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Economy
Preliminary estimates of US GDP are that the US grew 4.6% in Q4 2009, the best in two years.
The jobless rate rose in 43 states in December. Michigan saw a decline in the jobless rate. California remains at 12.4% jobless rate. The national jobless rate held at 10%, but only because of a huge exodus of people from the work force.
Internationally, German manufacturing orders rose 2.8% in November over October, which will likely boost their Q4 GDP growth. Euro Zone industrial new orders were up 1.6% in November over the prior month, three times the amount estimated.
China's Q4 GDP was up 10.7% in Q4 versus a year earlier, increasing expectations that China will soon raise rates.
Companies
GE Q 4 results beat forecasts: but EPS fell 22% and sales fell 10% to $41.4 billion. GE Capital squeezed out a modest profit. McDonald's Q4 EPS rose 18% and sales rose 7%, beating views, after two months of sales declines.
Schlumberger announced concerns over margins. Their Q4 EPS fell 35% to 67 cents per share, and sales fell 16%. Analysts also voice margin concerns at the company.
Harley Davidson posted a Q4 loss. Sales feel 40% to $764 million.
Johnson Controls beat views, with sales up 15% to $8.4 billion. The company makes car interior parts.
Air Products Q1 EPS was up 20% but sales dipped 1%, below forecasts, to $2.17 billion. Kimberly Clark, the paper maker, Q4 missed forecasts, as EPS was up 16% short of views, while sales were up 8%. Consumer's preferences for cheaper items hit margins.
Bank of America lost 60 cents per share, missing views, as did Morgan Stanley. Google's sales views only slight beat expectations.
Interest rates & USD
The 10 year Treasury note now yields 3.62%. The Euro closed last week at 1.4138. The Euro has been weak, and broke its 200 day moving average. The USD fell versus the yen to 89.95, on doubts about the new bank plan.
Equity Market indexes
The Dow Jones Industrials had its worst weekly drop (3 days) since March 6. The S &P 500 fell with the 2nd week of losses. Last week the S & P 500 fell 5.1% in three days. Major US equity indexes turned negative for the year, and broke their 50 day moving averages.
Three key issues worried equity markets last week: Obama announced restrictions on the proprietary trading of large investment banks along with a TARP tax, China announced restrictions on new bank lending, to be limited to $700 billion this year versus $1.4 trillion in 2009, and two Senators called for Ben Bernanke not to be confirmed on January 31st for another term as Chairman of the Federal Reserve.
For the week, the NYSE lost 4.4%, the Dow 4.1%, the S & P 500 3.9%, and the NASDAQ 3.6%. YTD the S & P 500 is down 2.1% as is the NYSE Composite, the NASDAQ Composite is down 2.8%, and the DJ Industrials are down 2.45%. The DJ Transports are down 2.31% YTD.
Performance
CRB futures closed down last week at 275.56, due to lower demand. Crude oil closed at $74.54 per barrel, the lowest since December 22, and below its 100 day moving average of $75.20. Gold was down $13.50 to $1089.70 per ounce.
Telecom shares have been falling in spite of a rally in defensive shares. Their dividends may be cut, due to Verizon and ATT both cutting 30% of wireless fees, their core business.
The USD fell last week against a basket of major currencies. Investors focused on new bank restrictions and TARP taxes, which was negative for the USD.
The best performing indexes for 2010, according to Investor's business daily, are Banks, up 3.01%, Health Care, up 2.27%, Junior Growth up .47%, and Senior growth, down .83%.
Commentary
Risk: The VIX has increased dramatically last week from 17 to 27, up 62%. Another measure of risk is whether defensive or offensive sectors are gaining most: recently, it has been defensive sectors. Yet another measure of risk is the Technology sector, and technology shares led the move lower...
However, investor optimism is at the highest in two years, per Investor's Business daily, believing there will be equity gains in the S & P 500.
Fiscal & Monetary policy
Banks: House Services Financial Committee Chairman Barney Frank announced that Fannie Mae and Freddie Mac should be replaced by a new mortgage system, with less government guarantees, which led to massive taxpayer losses.
China: China rejected Secretary of State Clinton's call to lift Internet restrictions and raised internet freedom as a human rights issue. She urged China to probe the cyber attacks on Google.
Interesting factt
Venture capital funding of new companies fell 14% in Q4 2009. Total funding was down 14% to $5 billion. Fewer IPOs and corporate buyouts are giving VC investors fewer opportunities to cash out. They are responding by focusing their funding on existing investments.
Russia's sovereign debt rating was raised by Fitch from negative to stable.
87% of US small business owners say their businesses will perform the same or better in 2010 versus 2009.
The GOP victory in Massachusetts eliminates the Democratic majority in the Senate, and will make it difficult to pass the Health Care bill. House leaders admit they lack the votes to pass the Senate bill. Obama Care has been temporarily stalled.
Exchange Traded funds, which a specialty funds that trade like stocks, have now reached $1 trillion in assets.
Conclusion
I will repeat my conclusions from last week, as it is still valid.
The US will have several years from 2010 on where households are paying off debt while the government borrows and runs deficits. It is a constructive event that consumers are paying off debt, but government deficit spending only defers the later pain where the government reduces its debt. Deficit spending now only delays the later pain of reduced spending in the future to pay down that debt. Additionally, in the next few years, the US must also tackle its entitlement programs, such as Medicare, where costs are growing at 10% plus per year. It is going to be rough to reduce spending and tackle entitlement spending at the same time. This will be two of the major challenges of the US in the next decade.
Japan has tried several times in the last twenty years to reduce their deficit spending and maintain their GDP, which is national income. But when they cut their deficit spending, GDP fell. When GDP falls, national income is lower, jobs are cut, and then with fewer individuals working, fewer debts are paid down.
A scenario that could play out in the US with fall elections is that new representatives are elected in the fall, removing the Democratic majority, with an agenda to reduce spending. Usually that is a good thing. But if government spending is cut, and GDP falls along with employment, that would be destructive in helping households pay down debt. And if the US government is spending as much or more as consumers are paying down, are we making any headway? I am also concerned that five years out, say 2015, that tackling debt and entitlement spending will require an iron will, which we don’t appear to have now. So, government debt continues to increase.
JP Morgan’s earnings release indicates that the consumer is still struggling to pay debt. It will take time to have the economy provide jobs. So, where will the boost to the economy come from, that will give the consumer the ability to pay off debt?
President Obama wants small business to create jobs, but there are many reasons for small businesses not to hire: more regulation and health care costs are two, along with an uncertain and challenging business environment.
I remain concerned about when the US Federal Reserve will begin withdrawing $3 trillion in stimulus, which came in the form of purchases of bank assets, bank guarantees and increased money supply. This will probably take place after Congressional elections, unless banks start lending again, which is doubtful. Too many banks have losses and must raise new capital. So, most likely the Federal Reserve will not withdraw the emergency programs until banks lend again. But the Federal Reserve will likely have to start withdrawing stimulus late in 2010.
Asset Allocation
I made no changes to allocations this week, raising cash and bonds and lowering equities and commodities.
There is still a 40% likelihood that the US could have a double-dip recession. January as a month produces investment gains about 72% of the time. But January is closing and we have just had three of the worst days for the Dow Jones Industrials in a year. All the major equity market indexes (S & P 500, Dow Jones Industrials, Nasdaq Composite) were falling below their 50 day moving averages, which is a sell signal. I will wait to sell stocks until I see stocks going lower in the next two trading days. If equity markets continue to fall, then this is a correction. The sectors falling most are materials, financials, and technology.
I see a dramatic change in risk assumed. The defensive sectors are rallying: health care, utilities, and consumer staples. So the mood of the market has changed dramatically, to a lower risk profile.
I think you should not be fully invested at this time. You should have some cash, as there will be opportunities when equity markets correct, which they always do. But, the timing of that is hard to predict. I think of cash as part of the bond allocation, and could be 19% to 25% of your portfolio.
I give you my asset allocation with this warning. Every one of you is unique in your investing goals, your risk tolerance, and your investing horizon (how long). So please understand this is a generic asset allocation model that must be adjusted to your individual situation. It also depends on the specific financial instruments that you currently own or are available to you. I can’t do all the positions that I recommend within a variable annuity or within a 401k. The most ideal situation to employ my strategies is a brokerage account, where we can buy ETFs (exchange traded funds).
Here are the three Asset Allocation recommendations at this time: low risk, meaning capital preservation and income oriented portfolios, medium risk which is moderate portfolio, with average risk, and lastly, a high risk portfolio, for growth and aggressive growth investors.
Equities
I believe that your asset allocation should include, large-, mid-, and small-cap stocks. I would allocate about 20-31% of your investment assets to large-, mid-, small-cap, and international stocks. I would lower overall allocations to emerging markets to between 8% and 10%.
Commodities
I would hold up to 25% to 30% of assets in commodities, with allocations to gold, oil, silver, and industrial metals (copper, zinc, aluminum)/
Bonds
I would hold the remaining assets in short treasuries, such as the I-share (ticker SHY), along with Treasury inflation protected securities (ticker TIP).
My current asset allocation would be for bonds to range from 20% for aggressive accounts to 30% for low risk accounts, and I would emphasize 1-3 year US Treasury bonds and Treasury Inflation Protected Securities (TIPS). As for commodities, I would own between 30% for low risk accounts to 35% for higher risk accounts, made up of oil, gold, silver, and industrial metals, and possibly, some mining stocks. As for equities, I would own large-, mid-, and small-cap stocks, and have some investments in international equities, primarily in emerging markets, such as Brazil, China, and Malaysia.
I would quickly revise equity ownership down with any poor performance in major indexes or in these specific positions, say 7% or more change in the S & P 500, or in the MSCI Emerging Index. I would also have stop limits on all equity positions (non-mutual funds, using stocks and ETFs), stopping out at between 7% and 20% below your purchase price or market price.
I would focus now on being well diversified. It is hard to predict what 2010 will bring, so the best advice is not to be concentrated in any positions. I have only bought a few growth stocks in the emerging markets, along with industrial metals.
Keep in mind that I consider equities in oil, silver, and gold to be commodity positions, in addition to equity positions. I am still emphasizing owning oil, gold, silver, along with industrial metals and commodity indexes to protect against inflation. My maximum equity allocation, with equities and commodities, is 61%. I prefer the moderate allocation, which would have 53% equities, with 26% of total funds being in commodities.
Right now it pays to be defensive. With defensive sectors doing well, that means the market is not rewarding risk. But be careful…markets are volatile and move sharply. With much uncertainty in the political landscape with fall elections, and with future taxes, I think the market could be flat for the year. We will soon find out if January ends on a down note. If market averages close down in January, then there is strong likelihood that the market will be down for the year. If markets continue to move down, I will begin selling some positions. I do think Chinese stocks have gone down with US markets, and they have stronger earnings. So, I expect them to regain value and appreciate.
Model Portfolio | | | | | Dated 1/26/2010 | AA | AA | AA | | | Low | Med | High | | Asset class | % | % | % | Position | |
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| | Bonds | 30 | 25 | 20 | TIPS | Cash | 25 | 22 | 19 | 1-3 year Treasuries | Commodities | 25 | 27 | 30 | Gold, Silver, oil, industrial metals, & commodity indexes | Split evenly among gold, silver, oil, industrial metals |
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| Equities | 20 | 26 | 31 | Chinese equities | 2/3 in the US, 1/3 emerging markets |
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| & equities in Emerging markets: China, India, Brazil |
| 100 | 100 | 100 |
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Best regards,
Brent Johnson, CFA, CFP®
Wealth Design Group
Mobile 713-598-3202
Email: brent_johnson@glic.com
*Registered Representative and Financial Advisor of Park Avenue Securities LLC PAS. Securities products/services and advisory services offered through PAS a registered Broker-dealer and investment advisor. Field Representative, The Guardian Life Insurance Company of America (Guardian) New York, NY. PAS is an indirect wholly owned subsidiary of Guardian. Wealth Design Group is not an affiliate or subsidiary of PAS or Guardian.
PAS is a member FINRA, SIPC. Securities offered through Park Avenue Securities, LLC, Member FINRA/SIPC.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
*Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
*Investor’s Business Daily is the source for Recent News
* Stockcharts.com & Economist are the source of technical information on the market and international market indexes.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Consult your financial professional before making any investment decision.
* You cannot invest directly in an index.
* Past performance does not guarantee future results.
* Links to other sites are for your convenience in locating related information and services. This Agency, The Guardian Life Insurance Company of America (Guardian) and Park Avenue Securities, LLC (PAS) do not maintain these other sites and have no control over the organizations that maintain the sites or the information, products or services these organizations provide. Although this Agency, Guardian and PAS believe that the information from these organizations is reliable, we cannot guarantee its completeness or suitability for any purpose. Accordingly, this Agency, Guardian and PAS expressly disclaim any responsibility for the content, the accuracy of the information or the quality of products or services provided by the organizations that maintain these sites. This Agency, Guardian and PAS do not recommend or endorse these organizations or their products or services in any way.
Sources for Economic News, Company news, Interest rates and USD, Equity Market indexes, World Recession Data, and Conclusion were Investor’s Business Daily, January 25th, 2010, Stockcharts.com for performance charts, and The Economist, January 23rd to January 29th, pages 66-74, and 89-90. |
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