The bear market rally is underway, and the normal course of action is for the rally to overshoot on the upside. This being said, many market mavens have been on the airwaves in recent days, first saying the bear market is over (Abbey Joseph Cohen- Goldman Sachs), and as early as this morning (CNBC), three guests on TV were advising caution. So whose right?
Probably, both. What I mean by this is the S&P may overshoot to the upside 1100-1200 by the end of the year, but 2010 could be another train wreck.
The fiscal stimulus program will probably raise the GDP numbers in the short run. The "cash for clunkers" program has left many car dealers short of inventory, and manufacturers will eventually ramp up production to make up for the shortfall. This means some laid-off workers will be recalled, and the jobs numbers should show improvement over the next few months.
The big question remaining is what will happen after the "cash for clunkers" program has run its course. In addition, any temporary pent up demand for vehicles will diminish quickly. This leaves a huge gaping hole for 2010.
CNN, FOX and others are hinting that the economy is back on its feet- and that the rally in July-August means it's time to start investing again. I say, not so fast. The time to get aggressive in the markets was in March 09, not now.
My best guess is the positive economic period will end around the December 09-January 10 time frame. Once again, I would not put my feet on the edge of the cliff, but instead would be taking profits during the rise.
Here are our Top 10 ETF's for the week of August 10th:
1) DBA: Powershares DB Agriculture Fund
2) EWZ: Brazil Index
3) DBE: PowerShares DB Energy
4) USO: U.S. Oil Fund
5) IYF: iShares Dow Jones US Financial Sector
6) DDM: Ultra Dow 30 Proshares ETF
7) PGJ: PS Golden Dragon China Fund
8) IYW: iShares DJ US Technology Sector Index Fund
9) IGF: iShares S&P Global Infrastructure Index Fund
10) CASH
Here are our Top 10 Fidelity Sector Funds for August 2009
1) FSPTX: Technology Portfolio
2) FSRBX: Banking
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSCPX: Consumer Discretionary
6) FSCSX: Computers & Software
7) FSCHX: Chemicals
8) FNARX: Natural Resources
9) FSENX: Energy
10) CASH
For the Week:
The S&P 500 is up 16% over the past month topping the 1000 mark, and the NASDAQ hit 2000.
While I watch the financial channels in the morning, I've noticed that many of Wall Street's movers and shakers are on vacation in Maine or Martha's Vineyard. This tells me that nothing big is going to take place until after Labor Day.
While on vacation in Maine, Pimco’s Paul McCulley said the recovery will be slow and gradual with economic growth coming in around 3 percent, and not 5-7 percent that many have been use to for the past 15 years. he went on to say that the Federal Reserve probably won’t raise interest rates before 2011.
I find my thoughts on the market and economy closely aligned to famed hedge fund manager Doug Kass.
Kass believes 'we are seeing nothing more than a second derivative recovery and that is temporarily replenishing inventories. He said that "the economy is only getting less worse from depressed levels."
Here are some of Kass' thoughts;
- The ingredients for a durable and self-sustaining recovery are missing as an economic double-dip grows more likely in a climate of corporate cost cuts, elevated jobless rates, wage deflation and continued pressure on personal consumption expenditures.
1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.
2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.
3. The consumer entered the current downcycle exposed and levered to the hilt, and net worth's have been damaged and will need to be repaired through higher savings and lower consumption.
4. The credit aftershock will continue to haunt the economy.
5. The effect of the Fed's monetarist experiment and its impact on investing and spending still remain uncertain.
6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.
7. Commercial real estate has only begun to enter a cyclical downturn.
8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.
9. Municipalities have historically provided economic stability -- no more.
10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.
The Economy
- The unemployment rate fell to 9.4% in July after peaking at 9.51% in June.
- The Labor Department reported that U.S. non-farm payrolls fell by only 247,000 after the automotive industry added 28,000 jobs after the cash for clunkers program began create shortfalls at the car dealerships.
- On Wednesday, the ADP employment index reported that private sector jobs fell by 371,000, while government jobs grew by about 125,000 in July.
- The number of people who have been out of work longer than six months soared by a record 584,000 to 5 million.
- The Institute for Supply Management (ISM) index, which rose to 48.9 in July from 44.8 in June – the strongest rise since September 2008.
- Federal tax collections are down 18% this year as the take from individuals income tax are down 22%, and corporate income taxes are down 57%.
-Gold
Gold hit a two-month high, and other commodity prices are rising, since 88% of the world’s commodities are priced in U.S. dollars
Crude oil prices closed higher for the fourth consecutive week, despite the world being amply supplied with crude. The main reason for oil’s rise is that crude oil is priced in the dollars, which has been steadily declining against most major currencies since early March.
-The U.S. Dollar
The U.S. dollar hit a 10-month low last week.
A weak U.S. dollar caused Treasury yields to rise to its highest level in two months. The 10-year Treasury bond yield rose from 3.66% to 3.89% last week.
Our current asset allocation is as follows;
85% Equities: (Normally 95%) Aggressive
72% Equities: (Normally 80%) Moderately Aggressive
56% Equities: (Normally 60%) Moderate
36% Equities: (Normally 40%) Moderately Conservative
18% Equities: (Normally 20%) Conservative
