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Notes to myself, possibly of interest to others.
-- Bill Northlich

Thursday, September 16, 2010

Vitus Update - On the one hand...

Long time no see/write, certainly since the last missive of 7/8.  Since then, the S&P and gold are up about 6%, the big tech's (goog, aapl) are up about 7%, and bonds are up about 2.4%.  Sort of a normal three-ish months it seems.

That is, despite my and others' constant raving about bad economic news (eg, directly below), good news is still able to surface (see further below) and the market seems to just do it's thing, although with a lot of volatility.  This is a market to make the ever-upbeat Jeremy Siegel happy.

However, the fact is that --

Bad News Continues.

Housing, employment, and consumer credit continue to tank.  Even the mainstream media are talking deflation.  Even David Stockman, Reagan's OMB Director, has chimed in recently on the L-shaped recovery theme, saying basically that most job gains since 2000 have been in health and education services, ie, in government-funded jobs, and that the core private sector (construction, manufacturing, services) has been decreasing.  That is, whether we realize/admit it nor not, we've been in a recession since 2000 or before, and it is on-going.

I've shown this chart before, but am showing again for reference.  (A different version is on page 5 of this presentation

The S&P has been flat for 12 years now, not seven as the chart indicates (it only goes to 2004).   

Rosenberg said a year ago "It's crucial to understand that secular bull and bear markets move in 18-year cycles, and to understand that today, we are really only halfway into the secular bear market."

Anyway, given the unremitting bad news on the economy, it is hard to come up with a positive scenario for the stock markets much before the next 3-6 years.  On the other hand...

The good news section
In the '90's, the economy was carried along by dot-com-ism and a huge stream of techno-innovations.  What could we now foresee in our current future which could get things going?  Here are some thoughts from your's truly.
  • Bloom Energy.  Bloom makes new efficient fuel cell technology.  Watch the video (long).  One example of many new energy efforts quietly happening.  
  • Moore's Law is holding.  10X denser devices in three years!
  • I've mentioned before that normal people go about their lives not paying a ton of attention to the econ. news of the day.  For example, in the big recession/high inflation period of the early 80's I was part of a group which started a technology company
  • A few green shoots:
Rosenberg section
I quote a lot from David Rosenberg.  Vitus clients and 'ol Vitus himself (me) have profited nicely so far from generally following Rosenberg's reasoning and direction over the past year.  At the risk of over-Rosenberging you, let me quote him from yesterday on the economy and on an appropriate investing stance given the flat several-year outlook for stocks and economic activity in general.  (Access to most Rosenberg references require a free sign-up)

Recent data:  “The S&P 500 continues to trade in a very narrow range as 1,040 acts as support on the downside and 1,130 resistance on the upside. The 4.5% surge in short interest in August has been squeezed out as the relief rally in September took hold on the view that the economy was not about to double-dip. Be that as it may, fragility is still in place... the inventory cycle is continuing even as sales are lagging behind. This could well set up a disappointing fourth quarter of little better than 1% growth in real GDP after what now looks to be 1.5% for Q3. So yes, the economy is not yet contracting, but it’s not exactly expanding that much either, certainly not enough to absorb the excess deflationary slack in the labour, product and housing markets.
"In fact, a just published report by Moody’s showed that there is so much excess housing inventory that it will take another three years for U.S. home prices to find a true bottom. That will be problematic for banks, as well as for consumer discretionary spending. Yesterday’s retail sales data were telling as consumer spending were concentrated on the bare necessities.”

Investment positioning:  “Safety and Income at a Reasonable Price (S.I.R.P.) has been a focus of ours, and when combined with gold, appears to be a very rewarding barbell — and not just for this year, but for the past 10 years... S.I.R.P., by the way, does not preclude a core position in dividend-paying equities (or preferreds for that matter). While we are “underweight” equities as an asset class, we aren’t exactly zero-weight. There are always things to buy and S.I.R.P. does involve a dividend theme, and as such it is encouraging to see company after company, even in the once-growthy tech space, catch on to the insatiable baby boomer appetite for income.”

Translation:  Hold or buy treasuries and investment-grade corporate bonds, and even, if you are brave, "high-yield" bonds.  Buy gold.  Buy what Jeremy Granthem calls "high-quality" stocks:  Stocks of companies with high and stable ROI's, and low debt.  These are such as Proctor and Gamble, Coca-Cola, Johnson and Johnson, and Microsoft.   Buy dividends.  Don't buy tech, real estate, consumer discretionary, etc.

Things to keep in mind.
  • The elections are in November.  If there is a Democrat rabbit to pull out of the hat, it will be pulled out.  Rumor has it that there will be some more Quantitative Easing by the Fed by then.  This will boost treasuries (the QE will supposedly consist of the Fed buying treasuries) and stocks (people thinking maybe it will work) and gold (people thinking maybe it won’t).  
  • IMO we are and will be in a range-bound market for quite a while, and, because of the bad econ. news, the likelihood of a break to the downside is much greater than a break to the upside.
  • This is not a time to take a lot of risk.
  • The numbers to watch are S&P 1130 for an upward breakout, and 1040 downward.
That’s all for now.  Be well,

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