December 2010 Economic Outlook

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December 2010 Economic Outlook

  1. 1. Las Vegas Real Estate ClubISSUE: DECEMBER 2010 Economy Report An integrated approach to nurturing your wealth and achieving your financial goals. Stay the CourSe and Keep your eyeS open This month the best thing you can do is stay the course. Stay the course for all the reasons I have described in many of my past many newsletters and webcasts. Right now commodities remain strong led by precious metals and the most recent economic indicators are showing that the current bull market rally is likely to continue. That said, it is still always wise to continue discussing these strategies with your financial advisor as they are working! The Jobless Recovery 7.9% to 7.6%. However, the job growth fell short of expectations. Sometimes bad news is actually good news. That’s the We are in a jobless recovery. The economy continues case for those who are heavily invested in gold stocks to improve even though unemployment remains very and commodity stocks. The recent U.S. job numbers high in the United States. This is really is a tale of two is a case in point. The U.S. job numbers came out and worlds. were disappointing. Economists expected 150,000 new jobs in the United States, but the actual number was For those who are unemployed the situation is getting 39,000. This is about one-quarter of the expected jobs. worse and for those who are employed they are We also saw the unemployment rate rose from 9.6% to spending at levels that compare to levels before the 9.8%. Great Recession and that spending is what is driving the economy. The impact of this announcement is that the Feds now have no choice but to continue their policy of low It really is amazing. The American recovery is well interest rates and quantitative easing. As you know, underway. The economy grew faster in the third quarter quantitative easing is the Federal Reserve’s program than originally reported and consumer spending has of creating money out of thin air. This of course is been surprisingly strong. We are seeing an economic great news for gold buffs as this policy puts downward recovery showing up everywhere except in the place it pressure on the U.S. dollar and as the U.S. dollar moves matters most, which is in the labor markets. downward we see gold and commodities prices, which are priced in U.S. dollars move upward. Currently, the United States has over 15 million people who are officially categorized as unemployed and this Until the Federal Reserve changes this policy or shifts does not include those that are “under employed” or its direction on low interest rates and quantitative easing who have stopped looking for work. With such weak we are going to see commodities and gold continue to job numbers I was surprised that all other indicators rise. Thus, this is an area all investors must continue to were so strong showing the economy continues to consider for their portfolio. improve. As many subscribers are from Canada, a brief update on that economy is in order. In Canada there were 15,200 additional people employed last month and the Canadian unemployment rate has fallen from Inside This Issue: PAGE 2: Economic Indicators Favor Recovery PAGE 3: U.S. Real Estate Continues to be Troublesome Mike Lathigee PAGE 4: The Impacts of China’s Currency Policy President, Las Vegas Real Estate Club And Much More...
  2. 2. grow. protect. invest. eConomiC indiCatorS Favor reCovery “The weak U.S. dollar is helping U.S. companies to grab international market share. As the U.S. dollar weakens U.S. goods and services that are priced in U.S. dollars become less expensive and as a result, we see more purchases from foreign buyers. ”Retail numbers, which are a gauge of because of the severity of this past far exceeds demand even though theconsumer confidence and drive 70% Recession. banks artificially hold supply out of theof the U.S. economy and 50% of the marketplace. Thus, we could see furtherCanadian economy, recently surprised Having said that, I believe the outlook price declines in certain areas.everyone in a positive way. The retail for job growth is positive. But it willresults for November, which includes the take time. Over the next few years the The big concern around this situationbiggest shopping day of the year known unemployment rate is in a downward is that housing is one of the mainstaysas “Black Friday,” beat the sales numbers trend. of the U.S. economy and accounts forfrom November, 2009 by 6%. Overall the economy is moving in the one fifth of gross domestic product. right direction. Low interest rates, Falling housing prices negatively impactWe are seeing very strong corporate stronger than expected retail sales, strong consumer confidence, because it meansearnings, which is a very important corporate earnings, and a downward the wealth of consumers is eroding andindicator of a recovering economy. trend in unemployment rates all point they do not wish to spend as much.However, corporate America is not to an economy that will continue to The bottom line is that we are a longreinvesting those profits into its workers. improve. way from a recovery in the U.S. housingCompanies still seem to be much more market and, unlike U.S. jobs marketsfocused on reducing debts and where the trend is upward this is notexpanding their business than on necessarily true for the housing market.hiring new workers. Also, it is not The housing market is the weakestunusual for companies to hold back economic indicator not showing anyspending on new workers after a signs of recovery in the near term.recession; especially a downturnof the magnitude we have justexperienced.The weak U.S. dollar is helpingU.S. companies to grab internationalmarket share. As the U.S. dollarweakens U.S. goods and services thatare priced in U.S. dollars become lessexpensive and as a result, we see more U.S. Real Estate Continues to bepurchases from foreign buyers. This is Troublesomea sore point with many other nations,who state the declining value of the Of course no discussion of economicU.S. dollar is impacting their ability to recovery is complete without commentscompete. These nations have threatened about the housing market. In a nutshell,a currency war if the United States foreclosures are up, home prices arecontinues to devalue its dollar. down and new home sales are at record lows.The Recession ended in the secondquarter of 2009, yet it could still be Nationally U.S. housing prices fell 1.5%many months before businesses develop over the last 12 months. The end of taxenough confidence to start new ventures incentives for new buyers and the numberthat will ignite new hiring. Studies of active foreclosures are weighingof many past recessions show that down the U.S. Real Estate market. Inbusinesses tend to hoard cash for up to many cities, particularly those in Florida,a few years after a Recession. I believe Arizona, California and Nevada, supplybusinesses are even more cautious now,
  3. 3. THE IMPACTS OF CHINA’S CURRENCy POLICy“If China successfully cools down its economy this will lessen the demand for commodities and we would definitely see the bullmarket rally in commodities slow down and possibly end.”China’s economy has an impact on all investors. For a hugenumber of Canadians, who have been making money in therecent commodities bull market, much of this positive growth isa result of the continuing double digit economic growth in Chinaand the country’s demand for commodities. However, investorsmust be aware that as China changes its monetary policies wemay see a shift that could dampen demand for commodities.Given the high inflation rates in China, the loose lendingpractices of banks and housing prices that continue to skyrocket,the Chinese are formulating new policies to control growth intheir economy.At this time inflation in China is at 4.4%, however, it is importantto remember that there are more than 1 billion poor people inChina and an increase in their living expenses could cause socialunrest. Thus, the most likely move the Chinese government willmake will be to raise interest rates.Raising interest rates is the greatest protection against risinginflation and out-of-control bank lending. Raising interest rates is also a way to slow a housing marketthat is showing no signs of slowing down on its own.If China successfully cools down its economy this will lessen the demand for commodities and wewould definitely see the bull market rally in commodities slow down and possibly end. This wouldimpact those investors heavily invested in the commodities market.I know that a large number of my Canadian subscribers, especially those in Western Canada, areheavily invested in commodities. Thus, it is imperative that we carefully watch what is happening inChina.The Two Economies of CanadaIn Canada it is estimated that over the next 20 years the economy will expand by an average of 2.5%per year in real terms. This is lower than the 3% growth rate over the last 20 years. The main reasonfor this lowered expectation is Canada’s strong geographical and economic tie to the United States.The only way I see Canada outperforming its 2.5% projected growth per year over the next twodecades is if Canada creates much higher exposure to China and other emerging markets. Thisexposure would develop stronger trade relations with other nations and reduce Canada’s heavydependence on the United States for its economic health.Internally, Canada remains a country of two economies. On one hand, we see a booming commoditiessector resulting largely from the dropping U.S. dollar. On the other hand, we see a decimatedmanufacturing and export sector in Central Canada due to the fact that the Canadian dollar is toostrong.This shift in economic power from Central to Western Canada will have other impacts as well. AsWestern Canada becomes much stronger due to the commodity boom and Central Canada continuesto weaken due to its dependence on the manufacturing and export market, we will gradually see thepolitical power in Canada shift away from Central Canada and toward Western Canada. This politicalshift will take many decades.
  4. 4. SECTOR GROWTH IN THE UNITED STATES“Investors are looking for banks to raise dividends in 2011 and as a result this has caused a rally in banks stocks. I am still toocautious to buy bank stocks, but for the more assertive investor this could be a good trade to discuss with your financial advisor.”In the United States we are seeing certain new sectors beginning to move upward and investors musttake note of this movement. As the economy improves so does international trade. There is more needto purchase container and cargo ships and for this reason we are seeing the shipping sector begin tomove higher.I am still very concerned about the banking industry in the United States. This is because banksstill have enormous numbers of bad loans that still must be written off and the mark to market rulescontinue to allow accounting shenanigans with bank financial statements. I have discussed this manytimes. However, I am smart enough not to “stand in front of a freight train” and it is likely banks aregoing to see a rally and move upward.In other words, investors are looking for banks to raise dividends in 2011 and as a result this hascaused a rally in banks stocks. I am still too cautious to buy bank stocks, but for the more assertiveinvestor this could be a good trade to discuss with your financial advisor.Junior Commodities a Good Strategy AgainA low U.S. dollar, low interest rates, quantitative easing and impressive growth of emerging nationsaround the world have contributed to the continuous rise in junior market commodity stocks, includinggold stocks, that we have seen for the last several months. This trend will continue until there is achange in fiscal policy. Thus, investing in junior commodity stocks appears to be a good strategy onceagain and something to discuss with your financial advisor.There is no reason to sell off gold and oil positions at this time. However, it is always prudent to takeprofits as you are making money. Natural Gas has yet to show any significant increase, but is one areawith a lot of upside potential. A colder than normal winter is causing increased heating demand.In keeping with our theme of cash flow, which I have been focusing on over the last four months,things are going extremely well. Any investor who followed the cash flow strategy we’ve beendiscussing and taken action has been wise.Overall, the many types of cash flow investments we’ve discussed are doing well. In general,companies with increasing dividends are rising. The corporate bond market, which pays a yield of6.6% to 7% for AAA bonds is not only producing good cash flow, but the prices of the bonds are alsorising. So, this looks to be an area where investors should continue to focus. As a strategy, coveredcalls are also working well.Continue to listen to my economic webcasts and read my newsletters as the discussions I ampresenting would have led you in the right direction to make money.
  5. 5. grow. protect. invest. real eState For CaSh Flow “The inability of some European governments to service their national debt first manifested itself in Greece where a 100-billion Euro bailout was required and funded by the European Central Bank.”I remain most bullish on beaten down pay close attention to these situations. rates would move well into double digitsReal Estate that is producing positive The biggest and most important story causing social unrest.cash flow. As an example, we have been remains the European Debt Crisis. Withbuying dozens of Real Estate properties the most recent debt crisis in Ireland and For Canadians and Americans our exportin Las Vegas for $30,000 to $50,000 and concern over the solvency of European market would radically decline and thisare seeing them generate $700 to $900 banks the situation could lead to a full crisis could spread into other areas, someper month in rent. Plus, we are seeing a scale liquidity catastrophe. of which we are currently unaware. youwaiting list of tenants. can see why we must watch how this The inability of some European global debt situation evolves.For those who are interested to learn governments to service their nationalmore about the overall economy with debt first manifested itself in Greecea focus on the Las Vegas Real Estate where a 100-billion Euro bailout wasmarket as a case study, I strongly required and funded by the Europeanrecommend that you join me on a future Central Bank. European countries hopedEconomic Bootcamp. Tickets are just that the contagion would be contained by$197 per person and that includes all this bailout, which would give the Greekfieldtrip expenses including a gourmet government time to recover by imposinglunch. Send an email to education@ severe austerity measures.allianceinvestor.com if you would likemore details. Such is not the case. Ireland is now unable to meet its debt obligations andThis fieldtrip should be of particular The ECB has approved an 85-billioninterest to Canadian investors right now. bailout to try and restore Ireland’sThe Canadian dollar is essentially on par banking system.with the U.S. dollar. Combine that withthe downward movement in U.S. Real Ireland and Greece are smallerEstate prices and your buying power is economies, but we are also looking atmore than 30% stronger than it was just similar problems in Portugal, Spainfive years ago! and Italy where bond rates have risen dramatically to reflect much higher risk.Also on March 17 to 20 I am attending an According to the Libor numbers, even theeconomic summit called the Powerteam ECB lending rate to Britain has almostFinancial Economic Summit which doubled due to concerns about Britain’swill feature some of the top financial creditworthiness.forecaster on the planet. The themeof the event will be to determine what Now, here is the best way to interprettrends are underway and where you can the consequences of this European debtget the highest returns. If you would like crisis.to find out more and receive informationabout getting tickets once again just send Unless measures are taken to addressan email to education@allianceinvestor. the fears about European nationscom. defaulting on their debts, the financial system in Europe could freeze as banksThe Impacts of Global Debt and investors become unwilling to lend money. In a worst case scenario, lendingFinally, we have to discuss a few would come to a halt and governmentsgeopolitical events that could impact would default on their debt and interestworldwide economics. Investors must rates would skyrocket and unemployment
  6. 6. grow. protect. invest.north Korea aS a potential tipping point “We are seeing a great many changes in our world and will see a great many more in the days ahead. The world is definitely becoming a much smaller place as more and more evidence of our interwoven economies and policies come to light.”The other major story all investors must would host the 2018 tournament andfollow is the North Korea Crisis. Last Qatar would host the 2022 World Cup.month North Korea raised tensions inEast Asia when is shelled a small South This announcement was a hugeKorean military base killing four people. letdown for both the U.S. and BritainSouth Korea said it was conducting as both countries have the completemilitary exercises at the time, but insists infrastructure necessary to host the event.test firings were not directed toward The decision really did not make sense toNorth Korea. many people and it causes one to wonder if the decision was in fact a way for theThe problem is not getting any worse, but international community to rebuff theif something were to cause an escalation West.in tension in that region, North Koreacould become the tipping point that In closing, let me just state the obvious, Mike Lathigeetriggers the involvement of other players which is that we are seeing a great many President, Las Vegas Real Estate Clubsuch as Russia, China, Japan and the changes in our world and will see a great LVRealEstateClub.comUnited States. If this happens investors many more in the days ahead. The worldwill likely see the price of gold and silver is definitely becoming a much smallerrise due to extreme uncertainty. place as more and more evidence of our interwoven economies and policies comeA Hidden Message Behind to light.Qatar? As investors, we must stay informedI’d like to bring up just one last bit of about how these changing conditionsinformation that I find very interesting. impact our financial strategies. AsWe all know that soccer is the world’s always, I strongly recommend that youmost popular sport. Both the United discuss any investment ideas with yourStates and Britain were heavy favorites financial advisor and be vigilant aboutto host either of the 2018 or 2022 World your current investments. Also when theCups. yet, in a shocking announcement, economy webcast arrives in your mailboxthe international football association forward it to a friend and recommendknown as FIFA, announced that Russia they subscribe.

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