Financial Market Update
StrategicPoint of View®
June 28, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
New and existing home sales were expected to fall this past week, but not to tumble (down 33% and 2% respectively). But durable goods orders were up 0.9% (ex. new airplanes) showing that manufacturing has continued to improve due to business capital spending. The Federal Reserve took the headlines, reiterating its stance of keeping interest rates low for an extended period, but modifying its economic outlook to one more subdued. Revision of first quarter GDP from 3% to 2.7% echoed concerns by the Fed of slower growth.
S&P 500: 1077 (down 3.67% for the week and down 3.41% on the year)
Dow: 10,144 (down 2.94% for the week and down 2.72% on the year)
NASDAQ: 2223 (down 3.77% for the week and down 2.03% on the year)
US Treasury 10 yr: 3.11% (from 3.23% last week)
Crude Oil (August): $78.86 (from $77.18 last week)
Gold (August): $1,255 (from $1,258 last week)
USD/Euro: $1.2378 (from $1.2384 last week)
THIS WEEK
The G-20 Summit meeting will open the week. Expect a communiqué with some targets on deficit and debt reduction. Last week the housing market was the story, this week it will be the labor markets. However, a slew of economic data (Personal income, Consumer spending, Consumer confidence, ADP employment, Chicago PMI, Jobless claims, ISM, Construction spending, and Motor vehicle sales and Factory orders) will all lead up to Friday’s big jobs number, better known as Nonfarm Payrolls and Unemployment. For hard-core economists, the equation is simple. Employed people = people who spend money. Spending = growth. From our perspective, while we may hope that those frustrated in their job search will finally be able to land desirable jobs, we are not expecting job formation to expand meaningfully in the near term.
COMMENTARY
‘Proactive Patience.’ The phrase was coined by Todd Harrison, founder of the internet based financial media company Minyanville, in an essay describing what investors will need to practice over the course of the next decade. Harrison is not pessimistic – although he predicts that sensibility will replace the need to outspend and risk will be something you pay attention to, not continually discount. But he doesn’t make the next decade sound easy. We agree.
Proactive patience sounds like an oxymoron. Patience implies waiting quietly. Proactive behavior demands some action. But the two can work together in the coming decade to enhance opportunities to make money.
Patient investors benefit from their ability to adjust expectations and accept that every year doesn’t have to be the perfect year. Impatient investors tend to rush investments in order to chase returns. If the overall stock market outlook is boring and CD rates barely cover inflation, the impatient investor can be lured by the promise of outsized returns associated with high risk assets. The patient investor avoids impulsivity, thereby protecting himself from himself.
Proactive investors seek opportunity. They are not going to sit this decade out waiting for the good times to return. Money wants to make money and it will flow to where it believes the opportunities lie. The proactive investor looks for these opportunities, carefully assesses the risk/reward tradeoff and then buys or sells accordingly.
Note the importance of patience in doing the proper research for proactive investing. The right opportunities are the ones that won’t disappear if you don’t get in right away. And the longer term investor is often better off by not selling on the first signs of trouble but rather waiting to determine the nature and extent of that trouble. Carefully tracking investments and taking the time to test and validate your opinions is important before making any investment choice.
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We would be remiss without commenting on regulatory reform, crafted this past week by House and Senate lawmakers and anticipated to be voted on and signed into law by July 4, 2010. For investors, the most important proposed regulatory changes involve potential new rules for the larger bank and lending institutions. Proprietary trading is limited (the Volker Rule) along with the percent of Tier 1 capital that can be invested in hedge funds and private equity. In addition, traditional derivatives trading will be consolidated on derivatives exchanges. Overall, the regulations squeeze profits without threatening viability. They also impose their sanctions on the big institutions, isolating them from medium and smaller sized financial companies.
The new regulations do not ensure that another major credit crisis will be avoided in the future. Speculation can never be stopped completely and the transparency gained on traditional derivative trading may be lost to new products with new sales outlets, particularly overseas. Leverage (one huge catalyst in the 2008 credit crisis) was not addressed in the regulatory compromise. And many issues, such as the country’s massive debt, remain outside regulatory fine tuning.
But those companies that got us into trouble in 2008 are going to be more carefully watched, will have fewer profits and will be accorded greater accountability. If we do have another crisis in the future, this bill may have helped prevent our existing ‘too big to fail’ institutions from being the instigators. Beyond that, it is hard to predict which institutions in which countries are brewing our next set of problems.
Tune in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money Updates". Get the latest market news and our take on the day's events with our market commentary at 8:10am and 5:32pm. For more information, visit www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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