Welcome to our halftime report. We have a lot to cover, so let’s dive right in, and examine the state of the world economy markets, and a bit about life here in mid-2011.
The stories dominating the headlines as we cross mid-year are spread across the globe.
The plight of the modern Greek economy has dominated news headlines in recent months. Thus, a very quick review of 2600 years of Greek civilization is a good starting point for our discussion.
Five bailouts in 14 months. Alexander the Great must be turning over in his grave. The main issue for all of us is the path that the Greeks and other weak European economies went down to reach this point. Years of artificially-manufactured high living created this problem. Failure to acknowledge it or rein it in made it worse. This is not only a Greek, Portuguese and Spanish problem in Europe. It exist in the USA as well, as recent years have shown us.
If they stopped the clock on the first half of 2011, the S&P would have looked very different than it did a mere four trading days later. This is the nature of markets. See the 2 year return of the S&P and MSCI World Index vs. the 3 year return? That’s a dramatic difference. Source: www.morningstar.com
Winning and losing U.S. stock groups during the first half were varied.
Here is a list of positive arguments being made by various market pundits. Sources :http://www.rba-llc.com/pdf/TheDisconnectContinues.pdf http://www.smeadblog.com/investor-relations/missives/summer-bargains-galore
And, for equal time, here is the bearish argument, summed up by one very comprehensive source, who we think put it very well. Source: http://247wallst.com/2011/06/28/why-the-dow-will-plunge-to-7000/
At mid-year, the S&P 500 was only off about 16% from the all time high it hit twice. We have seen a 100%+ rally in just over two years, following a decline of over 55% that immediately proceeded it. This is not your father’s stock market! The 1980s and 1990s were a breeze compared to the last decade or so, and history shows us that this type of volatility is quite common in market history. Source: http://advisorperspectives.com/dshort/charts/markets/SPX-snapshot.html?current-market-snapshot.gif
We are likely still in the midst of a long-term or “secular” bear market. That does not mean that stocks fall continuously. It just means that sustained advances are harder to come by. Since many investors were educated about investing in the 1980s and 1990s, a glorious time for stock investors, a lot of re-education about how markets can behave has had to occur the past 11 years. Source:http://dshort.com/charts/SP-Composite-secular-bull-bear-markets.html?SP-Composite-secular-trends
Relative to what people earn working, home prices have fallen dramatically after surging for nearly a decade. Source: http://cr4re.com/charts/charts.html?Home-Prices#category=Home-Prices&chart=PriceIncomeQ42010.jpg
However, prices have yet to find a bottom Source: http://cr4re.com/charts/charts.html?Home-Prices#category=Home-Prices&chart=CoreLogicMay2011.jpg
Data on sales of new homes is bittersweet – homes are being sold, but many are situations that involve a short sale or foreclosure. Source: http://www.googlerealestate.com/shadow-inventory-2011 /
You don’t need us to tell you that the most popular sign in strip malls today is “FOR LEASE” Source: http://www.pcbe.org/pcbe.nsf/0/23be01a7bfc087ac8525786a00129529/$file/YAMARONE_04_06_2011.pdf page 20
At this point in the recovery, the U.S. is way behind past recoveries in restoring jobs that were lost. By now, it would not have been unreasonable to think that we could have closed the gap completely. But in fact, we are nowhere near that point. This more than anything else we discuss in this presentation is a thorn in the side of progress toward the next economic boom. Source: http://cr4re.com/charts/charts.html#category=Employment&chart=EmploymentRecessionsNov.jpg
Many of those who ARE working would like to be working more, but can’t find a full-time job. Sad but true. Source: http://cr4re.com/charts/charts.html#category=Employment&chart=EmploymentRecessionsNov.jpg
Even sadder is the possibility that some jobs are gone forever. Unemployment is no longer a temporary state for many. The key to turning things around will be to find new growth industries. http://cr4re.com/charts/charts.html#category=Employment&chart=UnemployedOver26WeekMay2011.jpg
Unemployment and housing are two significant headwinds for the U.S. economy today. Now, let’s examine some other important areas of the economic landscape.
Consumer confidence has bounced off of the severe lows of late 2009. However, it still has a ways to go to regain its early-2007 level. Why is this important? Because economic growth can’t occur unless people are enthusiastic about spending money. They need to be confident about their own futures to feel that way. Source: http://advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-and-Consumer-Confidence.gif
Gas prices surged for the second time in the past three years. That impacts the economy and psychology. Remember gas prices at $1.06 a gallon? Neither do we. Source: http://advisorperspectives.com/dshort/charts/inflation/headline-core-comps.html?/inflation/gasoline-crude-since-2000
The government releases two forms of inflation data each month. One includes the entire index, and the other excludes food and energy. With food and energy surging in price lately, the two versions of the index are now quite far apart. Source: http://advisorperspectives.com/dshort/charts/inflation/headline-core-comps.html?CPI-headline-core-since-2000.gif
A true market recovery will involve breaking the pattern of lower lows, and establishing new high ground. That could take years, if history is a guide. Source: http://dshort.com/charts/Dow/sixteen-real-recoveries.gif
Investing is an emotional cycle, that repeats itself over and over. We have observed that there are short-term and long-term versions of this, that play out in the markets on a regular basis. Source: http://wallstcheatsheet.com/trading/your-cheat-sheet-to-the-psychology-of-market-cycles-infographic.html/
The good news is that in all of this market and economic cross-current, the number of available diversification approaches is greater than ever before.
This picture is a particularly valuable one for investors to understand. It shows the results of a study that concludes that there are many paths to arrive at a similar long-term outcome. The question for every investor to answer, uniquely for themselves, is what combination of participation in up markets and protection in down markets is the best fit for their risk tolerance. Source: http://www.crestmontresearch.com/docs/stock-capture-graph.pdf
The up and down pattern of stock prices for the last decade is not unlike other bear market, such as the one from 1965-1981. A key point is that bear markets tend to end only when the common valuation indicator, the “Price/Earnings Ratio,” of the market is around 9x earnings. That is noticeably south of where we are today. Source: http://www.crestmontresearch.com/docs/stock-capture-graph.pdf
To combat the ongoing volatility in a time of economic malaise, dividends, which have been largely ignored as a component of total stock market return, could become more meaningful to investors again (lower chart). As the upper chart shows, the assumed “10% return” in stocks over the long-run is quite a myth. Many 10-year periods have produced annual returns well under 10%. This adds to the attractiveness of dividend income as part of the total return from stocks. Source: http://www.crestmontresearch.com/docs/Stock-Rolling-Components.pdf
2011 Half Time Report With Speakers Notes
Half-Time Report, July 2011 <ul><li>Global Economies and Financial Markets: </li></ul><ul><li>True Recovery </li></ul><ul><li>Or </li></ul><ul><li>“ Two” Big To Fail? </li></ul><ul><li>A love triangle between global governments, consumers, </li></ul><ul><li>and their debt… </li></ul><ul><li>Michael L. Schwartz, RFC, CWS, CFS offers securities and advisory services though </li></ul><ul><li>First Allied Securities, Member FINRA - SIPC </li></ul>$
The 4 Big Stories As We Enter The 2 nd Half of 2011: <ul><li>GREEK BAILOUT </li></ul><ul><li>GLOBAL DEBT </li></ul><ul><li>3. “TWO” BIG TO FAIL? </li></ul><ul><li>4. U.S. HOUSING, UNEMPLOYMENT, AND CONFIDENCE </li></ul>
A Review of Greek History 490 BC – Defeated Persians at Marathon 404 BC – Peloponnesian Wars, disunity 327 BC – Alexander the Great conquers Persia 900-1200 AD – Byzantine economic expansion 1453 – Fall of the Greek Byzantine Empire 1829 – Greek independence achieved 1940 – Fought off Italian invasion during WW2 1980-81 – Rejoined NATO and European Union 2001 – adopted Euro as its currency But wait, there’s more………………
2010 May 2 – first bailout ($43B) May 18 – second bailout ($18.7B) September – IMF says Greek reform “ahead of schedule” 2011 January – rating agencies cut Greek debt to “junk” February – third bailout ($19.5B) April – Europe leaders urge Greece to control spending May – S&P cuts debt to B (just above Pakistan) as anti-austerity protests rise June 8 – fourth bailout ($8.5B) June 9 – GDP tumbles 5.5% June 13 – S&P downgrades to CCC July 2 – fifth bailout ($17B) approved, for disbursement July 15 A Review of Greek History
Source: Morningstar 2011’s First Half: What A Difference A Week Makes! <ul><li>Other Observations: </li></ul><ul><li>Depending on your time frame, the equity markets look very different. </li></ul><ul><li>The past 15 years resulted in what some might consider a mediocre return for the S&P 500 (6.50%). Many “experts” predict similar returns in the future. The “10% stock market return” concept is likely more myth than reality. </li></ul><ul><li>Stocks and bonds have been a close match over the past 15 years. Bonds will be hard pressed to replicate those returns going forward. </li></ul>Name 2011 Thru June 24 2011 Thru June 30 1 Year 2 Years 3 Years 5 Years 10 Years 15 Years S&P 500 TR 1.78 6.02 30.69 22.29 3.34 2.94 2.72 6.50 MSCI World Free USD -0.10 3.99 27.84 17.51 -1.72 0.17 2.10 3.63 BarCap US Agg Bond TR USD 4.00 2.72 3.90 6.66 6.46 6.52 5.74 6.32
2011 FIRST HALF ASSET CLASS ADVANCERS INCLUDED:* Healthcare and Biotech stocks Energy stocks Silver (metal) Swiss Franc Retail stocks 2011 FIRST HALF ASSET CLASS DECLINERS INCLUDED:* Natural Gas stocks Alternative Energy stocks Gold and Silver Mining stocks India stocks Bank stocks * Source: Morningstar “ We Are All Winners” … Well, Not Really
<ul><li>Bulls Say </li></ul><ul><li>(The optimists’ view of the stock market going forward) </li></ul><ul><li>Low bond yields – Make stocks more attractive by comparison </li></ul><ul><li>Steep U.S. yield curve – A prelude to stronger growth </li></ul><ul><li>Strong corporate earnings – Many expect S&P 500 EPS at $100 this year </li></ul><ul><li>U.S. economic “cleansing” – Four years into it, banking system now recapitalized </li></ul><ul><li>5. Housing market is “cheap” – Most affordable in 60 years </li></ul><ul><li>6. Consumers living within their means – Past prosperity periods started like this </li></ul><ul><li>7. U.S. companies control the virtual economy: </li></ul><ul><li>* Ebay, PayPal, Apple, Facebook, Linkedin, Groupon, Fedex, UPS, </li></ul><ul><li>Amazon, etc. </li></ul><ul><li>U.S. role as a world leader: We feed the world, keep it secure, invent a large part of the best medical science </li></ul><ul><li>Source: Richard Bernstein, Smead Capital Management and others </li></ul>
<ul><li>Bears Say </li></ul><ul><li>(What could cause a large drop in the stock market by middle of 2012) </li></ul><ul><li>Recovery Is Uneven – Some regions of America are almost economically dead </li></ul><ul><li>Underwater mortgages – More than a quarter of US mortgages are underwater </li></ul><ul><li>Stocks are expensive – Stocks looked cheap in late 2007 until earnings collapsed </li></ul><ul><li>Inflation – Can’t afford higher food, clothing prices when incomes are not moving up </li></ul><ul><li>Companies hoarding cash – Dividend increases help shareholders, but no one else </li></ul><ul><li>Everyone's shedding their workforce – Companies not hiring + government layoffs </li></ul><ul><li>China's slowing economy – Many American firms need China sales </li></ul><ul><li> </li></ul><ul><li>Greece is tanking – Will go under and take many other small EU nations with it </li></ul><ul><li>(A series of defaults among the nations may damage the bank and credit system more than the collapse of Lehman, decimate European banks) </li></ul><ul><li>Source: 24/7 Wall Street blog, by Douglass McIntyre </li></ul>
Thank You for Listening! Michael L. Schwartz, RFC, CWS, CFS offers securities and advisory services though First Allied Securities, Member FINRA – SIPC The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.