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LFM Commentary February 2010

LFM Commentary February 2010

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Published by eclane
Economic and Stock Market Commentary
Economic and Stock Market Commentary

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Published by: eclane on Feb 28, 2010
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02/28/2010

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The value of stock and bond markets is es-sentially the value investors put on the ex-pected returns of dividends/interest and thefuture value of the underlying investment.Since this total return on investment is anunknown quantity, investors anticipate, orhave expectations of, what the future valueswill be. (Short term traders have other mo-tives.)While, at any point in time, the value of amarket reflects the expected returns, mar-ket movement results from some combina-tion of two factors:
A change in those expectations, and/or
Fear or greed that a market has movedin one direction or the other too far,too fast.Looking back to the two most recent majormarket cycles for the S&P 500 (1995-2003and 2003-
2010), here’s what I observe:
 
From 1995 to around the middle of 2000, investors saw an explosion intechnology, especially use of the inter-net, and resulting productivity gains.The S&P rose at an annualized rate of over 26%
Then, in 2000, investors began to seethat many internet-related businesseshad no staying power and expectationsof never-ending productivity gains col-lapsed. Along with it, the S&P fell at anannualized rate of 28%
Then, around 2002-2003, the effects of easy creditbegan toshow up asconsumersbought eve-rything in sightat increasingly higher prices. The S&Prose nearly 14% annualized
In late 2007, reality set in that assetprices had gotten overextended andcredit was made available to many whocould not repay. The S&P fell nearly 70%annualized
Last March, investors came to the conclu-
sion that the recession’s impact on the
market was too extreme and governmentstimulus was on the way. A sharp cor-rection ensued as the S&P rose at a 75%annual rate (producing a 6.4% annual re-turn for the entire 15-year period).So, where does that leave us? Sensing thateach of the last 15 years of major marketswings in the S&P resulted from an unrealisticview of the underlying real value of the econ-omy, we are now left to discern what thatvalue really is
 — 
and put a price on it. How-ever, we are now in a period of great eco-nomic uncertainty. As a result, the market isvolatile, reacting quickly to news (and advice)that goes one way or the other
 — 
and
there’s plenty of it.
 There are many implications for investors,
some of which I will try to address in ―MyBottom Line‖ on page 9.
 What Moves Markets?
Stock Market Commentary .. by Ed Lane
February 2010
Lane Financial Management
Special points of interest:
The market sold off in January. Is this tempo-rary or a new normal?
Q4 2009 GDP growthwas 5.7% but there wasless here than meetsthe eye.
Market momentummay be shifting to thedownside.
Investment focusshould be on emergingmarkets and income.
Inside this issue:
What Moves Markets
1
At-a-Glance
2
Economic Recap
3
Market Recap
4-5
Momentum Watch
6-8
My Bottom Line
9
Disclosures
10-11
 
 
Page 2
Lane Financial Management
Here is a quick summary of this month’s
market commentary:
The Economy
Despite improved corporate earnings re-ports during the month, economic signals for January were not encouraging. Employmentand credit, my two primary bellwethers, re-mained weak. The GDP annualized gain of 5.7% in the last quarter of 2009 turned outto be based on seemingly unsustainable fac-tors.
The Market
The market took a decidedly negative turn inthe middle of January. Momentum indicatorsare barely hanging on to their preceding up-ward direction.
The Current Opportunities
Despite a sharp sell-off in emerging marketsand building materials, I believe the eventualoutperformance of the emerging marketeconomies will prove that these areas rep-resent the best investment opportunities forboth equities and income-oriented invest-ments. Technology and certain areas of health care along with consistent dividend-paying sectors (like utilities) and preferredstocks will also do well.
My Bottom Line
 The U.S. economy, and that of many, if notmost, other developed nations, face a nearlyimpossible situation with rising domesticdeficits and low cost employment competi-tion from emerging market economies (thesolution to one exacerbates the other).While those domestic businesses/sectorsthat are successful selling into or competingwith the emerging markets will do relativelywell, those that depend on domestic con-sumption will be severely challenged.
At-a-Glance
I believe we are on anirreversible trend to-ward more freedomand democracy - butthat could change.
 — 
Dan Quayle
 
 
Page 3
Lane Financial Management
The year started off with few sightings of green shoots. Much of the economic newswas less than cheerful:
Consumer credit in the U.S. dropped arecord $17.5 billion in November as un-employment, close to a 26-year high, dis-couraged borrowing and banks limitedaccess to loans. Fed policy makers havesaid tighter bank lending standards andreductions in credit lines are hamperingthe recovery. The series of 10 straightdeclines in consumer credit was the long-est since record-keeping began in 1943.
Employers shed 85,000 jobs in Decemberas the unemployment rate rose in 43 outof 50 states. Federal Open Market Com-mittee (FOMC) meeting minutes fromDecember highlighted a concern thathiring activity remains slow, especially inthe small business sector (the usualsource for employment growth). Theunemployment rate stayed at 10% in De-cember but it did so for a very bad rea-son. It was because the labor forceplunged 661,000 in what was the sharp-est decline in nearly 15 years. Withoutthat dramatic disengagement from the jobs market on the part of the generalpublic, the unemployment rate wouldhave spiked to 10.4%.
Over 7 million jobs have been lost sincelate 2007, probably more. According toRutgers University economist Joseph Se-neca in Wall Street Journal article fromlast October, if the economy returned to
the pace of job growth in the 1990’s
(about 180,000 jobs/month or twice therate in the period 2001-2007), it wouldtake another seven years for the U.S.unemployment rate to return to 5%.(As things have gotten worse since then,you be the judge as to how soon thiswill be happening.)
The so-
called ―misery index‖ (the sum
of the unemployment rate and the an-nual change in the CPI calculated byHaver Analytics) increased to its highestlevel in twenty-five years.
The big news was the fourth quarter5.7% annualized rate of improvement inthe GDP. At first, this looked like greatnews as the rate of increase exceededmost expectations. Then, as the com-ponent numbers received scrutiny, itturned out there was less there thanmet the eye. The largest source of gain(3.7%) was from a rebuilding of invento-ries as decumulation had occurred in
prior quarters. If sales don’t improve — 
and domestic demand growth slowedin the fourth quarter
 — 
that source of GDP gain will soon disappear. While I
don’t have the recent impact of govern-
ment stimulus spending, it was a littleless than 2% in the third quarter. I as-sume it had to account for somethinglike that in the fourth. The net result isthat this pace of growth looks unsus-tainable.Why oh why as reported by Bloomberg, didBruce Kasman, chief economist of JPMorganChase, say as a result of the GDP announce-
ment: ―We are getting on to something thatis pretty sustainable….‖ What am I missing?
Economic Recap
Isn't it strange? The samepeople who laugh atgypsy fortune tellers takeeconomists seriously.
 — 
Anon.

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