Economic Outlook While there is some evidence of green shoots, the eco-nomic environment remains weak. With the exceptionof a lot of activity surrounding the European debt crisis,little has changed since last month. Here are the factorsthat concern me the most (in no special order):
Housing: The Case/Shiller index of home pricesdropped 0.6% in the most recent report (for Septem-ber) and prices remain about 3.6% below year-ago lev-els. Small improvements have occurred in the num-ber of new and existing home sales, but not enough tobe meaningful.
Employment: November job data announced at thebeginning of December was 120,000 non-farm payroll
jobs vs. 125,000 expected. Prior months’ figures were
revised upward from 80,000 to 100,000 for October and from 158,000 to 210,000 for September. The un-employment rate decreased from 9% to 8.6%. Thesefigures are certainly to be appreciated, but they arenot nearly the stuff of which a recovery is made.
European debt: This crisis was the driver of nearly allmarket action during November with off-again, on-again reports of crisis mitigation or resolution. In theend of the day, it does seem like we are getting closer to a plan to save the Euro, though any agreed plan willtake time to implement, if it survives at all. At stake isthe fate of the Euro and financial stability in the Euro-zone brought on by excessive and unsustainable sover-eign and bank debt. From what I can tell, there arefew avenues out of the debt predicament, alone or insome combination: achieve funding from the ECB and/or the IMF sufficient to support the debt and keep in-terest rates from creating a solvency crisis; decreasethe value of the debt through inflation (printingmoney, like QE) and/or restructuring; implement suffi-cient austerity measures to allow debtor nations paydown their debts; and/or grow economies faster thandebt growth. Unfortunately, for political and practicalreasons, none of these solutions represent a near termfix (if a fix at all) and the bond markets and ratingagencies are visibly reaching the end of their patience.That said, I think the political and investment commu-nity pressures are such that we will eventually inch for-
ward to some sort of a positive outcome, but it won’t
happen overnight and may not happen soon.
American debt: November wasn’t a such a good
month for the U.S. either, as the so-called Super Com-mittee, charged with coming up with a plan by Thanks-giving to reduce the deficit over the next ten years, dis-banded without reaching an agreement. While this
may have contributed to some of the market’s decline
prior to Thanksgiving, the subsequent recovery(apparently a result of potentially positive news com-ing from Europe) tells me the market either is not allthat concerned about U.S. debt and deficit levels or be-lieves the problem will be handled soon, perhaps as anoutcome of the presidential election next year.
Political gridlock: Evidence continues to be absent for a break in the political gridlock in Washington. Far from it. And now we have to look forward to whether Washington will be able to extend the payroll andother tax breaks into next year in order to help keepgrowth to at least a non-recessionary level.I have low expectations for the economic outlook over the next several years and will say more about this in myFearless Forecast for 2012 in January. Suffice it to say for
Stock Market Commentary
Lane Asset Management
now that I expect slow but positive growth as the world continues to deal with its debt overhang.All bets are off if the Euro fails or war or a major terrorist attack hits somewhere in the world,heaven forbid.Investment Outlook If not shaken by an extraordinary event, the stock market moves with corporate earnings. In fact,earnings have been decent so far in 2011 but arenow looking like they will go out like a lamb in Q4.In fact, the sources for those earlier profits/EPSimprovements
workforce reductions, exports,foreign sales and stock buybacks
all look likethey are reaching the limit of their usefulness.On a purely technical basis,, while leaning positive,there is not a whole lot of support for great confi-dence in equities other than their relative per-
formance to bonds (see pg. 7). Therefore, I’m go-
ing to stick to nearly the same recommendationsmade last month (dropping bonds for now):
High quality, dividend paying common or pre-ferred domestic stocks
Broad market indexes such as the S&P 500, andespecially mid- and small-cap U.S. stocks
For sectors, regional banks, energy, consumer staples and utilities
For taxable accounts, municipal bond funds.Keep in mind that these recommendations arebased on a point in time and are subject to change with changing data. Investors need to be preparedfor continuing volatility.