Archive for March, 2010

More Earnings Restatements

Tuesday, March 30th, 2010

Well the emails have been coming in and so far the requests have tilted toward the Ride of the Valkyries scene from Apocalypse Now.

Clearly this video is not for everyone as it is Oliver Stone’s visual commentary on man’s cruelty to man and the overkill of the US Military, but from a cinematic standpoint the use of the classic opera aria and the visuals of the helicopter attack are classic film making. And its a really cool guy movie.

As you read in yesterday’s blog posting, history is on my mind.

Today, Illinois Tool Works announced that it was going to have to take a $22 million hit to earnings this quarter due to the passage of the health care reform bill last week. This comes on top of several others (AT&T, Deere, AK Steele, Caterpillar, Prudential Insurance, and more to come) that have announced almost $1.5 billion in restated/lost corporate earnings.

These announcements have brought about lots of rhetoric from both sides of the health care debate – Rep Waxman is even calling the CEO’s of these companies to Washington to grill them before a Congressional Hearing because the CBO estimates said the legislation would save money.

I wanted to give you the facts so you can decide for yourself:

(1) the losses come from a provision in the legislation that ends a subsidy to corporations that provide retiree prescription drug benefits – this subsidy was enacted by Congress when they passed the Medicare Part D program because it was a cheaper alternative to give money to the corporations than to have them end their programs and those retirees join the Medicare Part D program – significantly cheaper as it cost tax payers $233 per retiree for the subsidy but would cost $1,203 per retiree if they joined Medicare Part D; under the new law, the companies will no longer receive this $233 per retiree;

(2) the Sarbanes-Oxley laws enacted after the Enron scandal requires corporate CEO’s and CFO’s to immediately restate earnings in the current quarter and publicly announce those restatements when changes in financial position become known; the penalty for not publicly restating earnings is jail time and huge personal financial penalties for the CEO’s and CFO’s; since it is known that the loss of the government subsidy is $233 per retiree, they are required to make it public and restate their earnings otherwise they can go to jail and endanger their families financial futures;

(3) the Financial Standard Accounting Board’s 1990 statement No. 106, which requires businesses to immediately restate their earnings in light of their expected future retiree health liabilities governs the financial reporting in this instance; again, since the $233 per retiree impacts future retiree health liabilities, these companies have to restate earnings and publicly announce it. If they don’t, they can’t pass their independent audits and the auditors would restate their earnings and make the announcements in their stead. The information would become public one way or another.

Those are the financial reporting facts, so I don’t think there is some corporate conspiracy to undermine the new health care legislation – the CEO’s are required by law to restate corporate earnings and make it public or suffer penalties that none of us would believe worth the risk.

The less debated issue is that this has been a sort of corporate welfare program (or maybe less harshly a financial windfall) that these companies have enjoyed that has allowed them to supplement their bottom lines while providing benefits to their former employees that they would have likely provided anyway – had Medicare Part D not come along. The subsidy was a way for the Congress to keep a significant portion of the retired population off of Medicare Part D to make the financial projections of its cost more acceptable to the gullible public. Quid pro quo, Clarice.

The problem now is that earnings projections included the subsidy and now it’s gone. Those projections have to be revised and reported. The Congress may not like it, but that’s the way the laws are written and the penalties to the CEO’s and CFO’s are so severe that no one is going to err on the side of under-disclosure.

But what is really scary is now that the subsidy is gone and Medicare Part D exists, there is really no reason to expect these corporations to continue to provide retiree prescription drug benefits. These retirees – at least a significant number of them – can easily be expected to join the Medicare Part D ranks as corporations decide to wind down their own programs.

This, if it happens, will increase the deficit beyond current projections. If the members of Congress had looked back a few years in history to when they approved Medicare Part D and the subsidy, they would have recalled the debate on the $233 cost Vs the $1,203 cost. Now, the forgotten consequences of that debate are being realized. This isn’t a qualitative statement on the health care reform as Rep Waxman is asserting – it is either just accounting and financial reporting according to current law or a quid pro quo come home to roost, depending upon your viewpoint.

Given the other issues we’ve discussed on this blog that are headwinds to further near-term equity gains in this technically overbought market, and this reduction in corporate earnings coming from the lost retiree drug benefit subsidy, I am more confident than ever that the lessening in the level of equity exposure and increase in fixed income exposure that we have been implementing is the correct strategy for the current market environment. Normally we’d substitute cash for equities, but since cash is earning only a hundredth or two of a percent in interest, fixed income is the only real alternative.

I am not expecting a return to last year’s lows in the market, but pullback to a technical level of support where valuations are lower given potentially lower corporate earnings seems a reasonable expectation. Locking up a portion of the hard won gains we’ve seen since last March and reinvesting in the equity markets at a lower level as we move through the range bound market is the proper investment strategy for this time period.

Later on, the range bound market will end and either a new cyclical bear or bull will begin. Eventually the secular bear we are in will end and a secular bull will begin (Maybe 2014? Secular cycles are roughly 14 to 18 years in length – the last one, the Reagan-Bush-Clinton bull of ’82 to ’00 went 18 years) and it will allow us to buy and hold instead of moving between fixed income and equity exposure. We just aren’t there yet.

History matters, for investors and politicians. It’s wise to pay attention.


37 Years Ago Today

Monday, March 29th, 2010

I admit it, I’m a history geek. And today is one of the seminal events in history during my lifetime: 37 years ago today, the final group of Americans was released from North Vietnamese Prison Camps and 37 years ago tomorrow, the North launched the final leg of what would be the fall of Saigon a bit over two years later. On April 30, 1975 (yes, the 35th anniversary is right around the corner) the North invaded Saigon and reunited the North and South under communist rule.

History is important and even though we in the investment business say that history is no guarantee of future results, it sure can be used as a guide for our actions. Right now, our actions are all about raising cash in client accounts through stop losses and price target sales – with plans to reinvest when the market pulls back to technically oversold levels. The last time we saw these signals in an uptending market were in June, 2008 when we raised a significant amount of cash. Clearly we didn’t see a crash coming – no one did – but the indicators told us that a correction was ahead.

I am working on the quarter-end newsletter and it is difficult. I’ve started it in numerous ways and tossed the results, only to start over yet again. I want it to tell you that the past year has been a historic recovery from a historic crash. I want it to tell you that the fall and subsequent rise in stock prices is really just a segment of a larger cycle that you can see in the market going back almost 140 years. I want it to tell you that the period just ahead requires a different style of investment management than the year just past. I want it to tell you that increased regulations and taxes present a drag on economic growth and puts a floor under unemployment, much like Europe, but that it isn’t the horror show that many are predicting (unless of course you are one of the 10% that are probably semi-permanently unemployed).

And I want to tell you all this without raising your blood pressure – the newsletter is not a qualitative statement on anyone or anything but rather a map for us to navigate the investment markets using history as a guide.

Based upon history and how the markets have behaved when certain technical indicators have reached currently overbought levels, the markets go down. Based upon history, when interest rates start to edge up like they have the past week, markets go down. Based upon history (European, that is), when a society transitions to providing a social welfare safety net that is funded by the middle class and upper class, economic growth slows and unemployment remains unreasonably high.

But, you’ll read more about all of that in the newsletter. For today, its probably better to reflect on what happened 37 years ago today and hope that our current efforts in the Middle East end better.

’69’s Summer of Love and ’09’s Summer of Tea. History doesn’t repeat but it sure can rhyme.


PS – over the next month, I’d like to incorporate some videos from YOUR favorite movies and music related to the Vietnam war era and see how we can weave them into our investment discussions. They can be movies of times, music from the times, or news clips showing action from the time. You tell me what moves you about that period and I’ll work to find it and work it into our blog posts between now and April 30, 2010. Have fun and be reflective – I’m sure I will.

The Day Social Security Died

Thursday, March 25th, 2010

OK, maybe the title of this blog post is a bit melodramatic, but it fit the video below 🙂

The New York Times reported today that the Social Security program will collect less than it pays out in 2010, several years before any of the analysts predicted. This is a big story and I’ve heard only passing comments about it.

What our country has been planning on is that we wouldn’t get to this point until 2037. All of our spending plans (from both R and D governments) have been based upon the excess revenues over payouts being used to help fund the deficit. If the government has to pay out more than it takes in, that increases the deficit and our national debt.

The high level of unemployment is the proximate cause of this issue, but the government is forecasting unemployment to return to much lower levels in their forecasts for the deficit and economic growth. Don’t believe it. Unemployment will stay high for an extended period of time and this issue of the Social Security Trust Fund (which really does not exist – we just have the promises of the government that they will pay Social Security benefits when they are due) will be a new “crisis” in due course.

The article talks about the last time we had such a crisis. Look for a Social Security Czar to be appointed by either the current or a future President to try to fix this problem. The fix? Increase the age to start receiving benefits, lower benefit payments, and raise the Social Security tax. These all suck, but there is really no other way to fix this program.

At the same time, there will need to be a significantly increased level of savings by the general public. When I was in Washington DC earlier in the month, I heard talk of ways to fund the deficit that would require your 401k to purchase treasury bonds instead of mutual funds. Today there was a story about one of the large unions lobbying for a national retirement system that would negate your current 401k and require you to contribute into it.

Its going to get ugly, maybe not right away, but mark today on your calendar as the turning point .

Here is the story:

March 24, 2010
Social Security to See Payout Exceed Pay-In This Year

The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.

The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.

“When the level of the trust fund gets to zero, you have to cut benefits,” Alan Greenspan, architect of the plan to rescue the Social Security program the last time it got into trouble, in the early 1980s, said on Wednesday.

That episode was more dire because the fund could have fallen to zero in a matter of months. But partly because of steps taken in those years, and partly because of many years of robust economic growth, the latest projections show the program will not exhaust its funds until about 2037.

Still, Mr. Greenspan, who later became chairman of the Federal Reserve Board, said: “I think very much the same issue exists today. Because of the size of the contraction in economic activity, unless we get an immediate and sharp recovery, the revenues of the trust fund will be tracking lower for a number of years.”

The Social Security Administration is expected to issue in a few weeks its own numbers for the current year within the annual report from its board of trustees. The administration has six board members: three from the president’s cabinet, two representatives of the public and the Social Security commissioner.

Though Social Security uses slightly different methods, the official numbers are expected to roughly track the Congressional projections, which were one page of a voluminous analysis of the federal budget proposed by President Obama in January.

Mr. Goss said Social Security’s annual report last year projected revenue would more than cover payouts until at least 2016 because economists expected a quicker, stronger recovery from the crisis. Officials foresaw an average unemployment rate of 8.2 percent in 2009 and 8.8 percent this year, though unemployment is hovering at nearly 10 percent.

The trustees did foresee, in late 2008, that the recession would be severe enough to deplete Social Security’s funds more quickly than previously projected. They moved the year of reckoning forward, to 2037 from 2041. Mr. Goss declined to reveal the contents of the forthcoming annual report, but said people should not expect the date to lurch forward again.

The long-term costs of Social Security present further problems for politicians, who are already struggling over how to reduce the nation’s debt. The national predicament echoes that of many European governments, which are facing market pressure to re-examine their commitments to generous pensions over extended retirements.

The United States’ soaring debt — propelled by tax cuts, wars and large expenditures to help banks and the housing market — has become a hot issue as Democrats gauge their vulnerability in the coming elections. President Obama has appointed a bipartisan commission to examine the debt problem, including Social Security, and make recommendations on how to trim the nation’s debt by Dec. 1, a few weeks after the midterm Congressional elections.

Although Social Security is often said to have a “trust fund,” the term really serves as an accounting device, to track the pay-as-you-go program’s revenue and outlays over time. Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after year.

Now that accumulated revenue will slowly start to shrink, as outlays start to exceed revenue. By law, Social Security cannot pay out more than its balance in any given year.

For accounting purposes, the system’s accumulated revenue is placed in Treasury securities.

In a year like this, the paper gains from the interest earned on the securities will more than cover the difference between what it takes in and pays out.

Mr. Goss, the actuary, emphasized that even the $29 billion shortfall projected for this year was small, relative to the roughly $700 billion that would flow in and out of the system. The system, he added, has a balance of about $2.5 trillion that will take decades to deplete. Mr. Goss said that large cushion could start to grow again if the economy recovers briskly.

Indeed, the Congressional Budget Office’s projection shows the ravages of the recession easing in the next few years, with small surpluses reappearing briefly in 2014 and 2015.

After that, demographic forces are expected to overtake the fund, as more and more baby boomers leave the work force, stop paying into the program and start collecting their benefits. At that point, outlays will exceed revenue every year, no matter how well the economy performs.

Mr. Greenspan recalled in an interview that the sour economy of the late 1970s had taken the program close to insolvency when the commission he led set to work in 1982. It had no contingency reserve then, and the group had to work quickly. He said there were only three choices: raise taxes, lower benefits or bail out the program by tapping general revenue.

The easiest choice, politically, would have been “solving the problem with the stroke of a pen, by printing the money,” Mr. Greenspan said. But one member of the commission, Claude Pepper, then a House representative, blocked that approach because he feared it would undermine Social Security, changing it from a respected, self-sustaining old-age program into welfare.

Mr. Greenspan said that the same three choices exist today — though there is more time now for the painful deliberations.

“Even if the trust fund level goes down, there’s no action required, until the level of the trust fund gets to zero,” he said. “At that point, you have to cut benefits, because benefits have to equal receipts.”

Easy Trivia: What is the significance of this song, along with the names of the three artists it describes.

Hard Trivia: Name the TV sitcom family that had a “hit” cover of the song.

US Government Bonds – Sinking Fast

Wednesday, March 24th, 2010
Click on the graph to see the source file

Click on the graph to see the source file

The chart above is of the TLT ETF index mutual fund for the +20 year US Treasury. This is an ugly chart.

It has broken down decisively today as the sale of the 5 year Treasury was very weak. Investors are extrapolating that if people are not very interested in tying their money up for 5-years at today’s rates, significantly fewer will be interested in tying it up for +20 years UNLESS bond rates move much higher.

Readers of this blog know that we have been forecasting higher bond market yields in spite of our forecast that the Federal Reserve will keep short-term yields low. This has been playing out all year, but it has been via yields in the one and two year range falling with the +20 staying relatively flat. Now, I think you’ll see investor expectations start to drive the +20 year yields higher in order for the government to continue to fund our budget deficits, and a further steepening of the yield curve.

And this is just the start. Wait until we get to 2013 (see my blog post from earlier this month after a meeting with a soon-to-be US Senator and his view of 2013).

I’ve been reading some analysts discussing the strong possibility of a double dip recession in 2011-2012. If this comes to pass (and I have not yet bought into their theory) we could see economic contraction and significantly higher bond yields – not a pretty scenario for anyone that is hoping for falling unemployment to increase the tax base and reduce the deficits.

But all of that is in the future. Right now, we only have investor reactions to today’s government bond sale and their initial take on it is that rates will be higher in the future.

Your trivia for today: you probably recognize the British singer in the video above. In 1969 he and Eric Clapton formed a group that released only one album. The artwork on the album caused quite a stir (I recall my mother not at all pleased with her son owning it) and it wasn’t the airplane that was the issue. Can you name the singer, the group he formed with Eric Clapton, and what was on the album cover that caused such consternation.


It’s a Forest and Trees Sort of Thing

Sunday, March 21st, 2010


It’s easy to get focused on the current happenings in the market and lose track of a longer-term view of how the current happenings fit into context, sort of like not being able to see the forest for the trees.

If you look at the chart above, you’ll see that we have passed a fairly momentous event – the S&P 500 Index weekly chart has crossed above the 200 week moving average. Crossing above and below the 200 week moving average is not a common thing, and generally it means that the direction of the market is confirmed for at least the intermediate term.

Is it a certainty? Not at all – look at 2001 where the market moved above the 200 week average for a short time before dropping precipitously and staying below it for a few years.

You can also see that in January, we moved up to the average and were turned away. Having broken through it is a good sign that there is strength to this move on an intermediate-term basis. On a short-term basis this chart means nothing – we can have a pull back that can be painful yet the weekly trend can stay intact. However, any move back to the 200 week average that does not breach it to the downside can be used as a buying point for those that are under-invested.

If you read the previous post, you know that I anticipate a short-term pullback based upon the overbought status of the broader market. However, any pull should be contained to the 200 week average and could be used as a fairly safe purchase point.

I’ll keep you in the loop on these technical levels as we move through the next few weeks to see how it all plays out.

It’s been a strange Sunday – I’ve spent it in equal parts working on client investment portfolios, watching basketball, and watching CSPAN for the health care debate and vote.

Your trivia for tonight is to figure out which popular movie sequel this appeared in. The movie is about a law student that interns on capitol hill.

In a little while, we should know the results of the vote for health care reform. As I’ve been watching today, it sure looks like it will pass.

Have a great week!


Market Trend Update

Saturday, March 20th, 2010


The market has been on a major run higher in recent sessions and consequently is overextended on a short-term basis.

The short-term indicators I follow on the chart above (the RSI and Stochastics) show that we are very overbought an due for a pullback.

The McClellan Oscillator has dipped below zero and the 10-day moving average of the Advance Decline Line has dipped below the 30-day moving average. This tells me that we should expect to see a pullback next week – absent any major positive news to encite investor enthusiasm.

Also, the VIX volatility indicator below 20 shows us that investors are way too complacent with the current market action. This is a contrary indicator, so complacency is a bad thing.

On an intermediate-term basis, the Summation Index is still showing a market that has strong positive momentum and the MACD is still showing a positive intermediate term view of the market. Cash Flow is still strong, but both the Accumulation/Distribution Index and the On Balance Volume Indicator are starting to weaken.

All-in-all, I’d anticipate that we’ll see the market pull back to the 13-day or even the 34-day moving average depending upon whether there is any negative news that hits next week. I’d look for a move down toward 1150 or 1125 (lots of folks I talk to in the industry have stops at 1150, so if we drop below there look for selling to accelerate). That being said, the monetary stimulus fundamentals are still strong and could push us a bit higher before a pullback.

However, the intermediate term technicals show that a move to the 13-day or 34-day moving average would be an entry point for any cash on the sidelines.

A year ago, the market recovery was young and everyone feared it. The VIX was over 40 and no one believed that we’d ever have a recovery. Today, a bit over a year into the recovery, I hear investment managers shouting the all clear signal on local radio talk shows, I see the VIX below 20, and it makes me take a second look.

I still believe we are in a secular bear market but the current move is a cyclical bull counter-trend rally. Those counter-trend rallies can be very big moves and last longer than anyone believes possible. They also sucker people in that sold at the bottom and held out too long before getting back in.

There is too much monetary stimulus for any down move to be significant, but if you are one of those that want back in having sold near the bottom, I think you should wait for the market to come back to the moving averages before you commit your capital.

You will also want to stay on top of your investment as this will not be a straight move up to the 2007 highs so you will need to protect your profits.

Also, the past year was a beta driven move where the rising tide lifted all boats. Going forward you will need to be in the right investments that have catalysts for growth.

In my upcoming newsletter that will be mailed in a couple of weeks, I will be telling you more about the investment themes we are using to guide our activities and tell you more about the bull/bear market cycles.

Never a dull moment…

I’ve mentioned before that The Killers are one of my favorite new bands. Your trivia question for today is to tell me the connection between the name of the album that the song in the video appeared on and the band’s home town.

Enjoy the beginning or Spring!


Investment Strategy Update

Monday, March 15th, 2010

The market has moved into the treading water phase of this cycle with slight ups and downs waiting for news induced moves of any magnitude. From a technical standpoint, its tedious to discuss.

But, the good news is that it presents an opportunity to look at the fundamental side of our process and reassess our strategy. Much of the past year has been a beta driven bounce higher off the market lows – the proverbial rising tide lifts all boats.

Now, however, we are at the point where not all investments will go up together. That means that investors need to have a plan that includes various catalysts for the investments they hold. Fortunately, we have such a plan and I am in the process of writing our next Investment Strategies newsletter to mail out that explains what our major investment themes are and how we will apply them.

In this blog, though, I wanted to give you a preview. Resetting a strategy based upon a fulcrum in the market is a big undertaking as it requires analyzing what trends are developing that will impact the markets, determining what companies and investment types fit the strategy, and implementing them across the various portfolios we manage. That explains why I’ve been blogging less than usual, but gives me much fodder for future blogging.

Here are our investment themes for the post-crash-mid-recovery market we are in:

Third World Demographics – the strongest mega trend that we follow is the shift of over a billion people from subsistence living to the middle class in the Mercantile Economies.
Cash Flow – the focus is on companies that generate excess cash that will begin to add to bottom line income as interest rise later this year and on companies that distribute cash flow to investors in the form of above average dividends or partnership distributions
Credit – at the beginning of an economic recovery corporate credit investments are a good alternative to traditional equity investments as they generally provide similar capital gains plus a stream of cash flow in the form of interest which tends to make them inherently less risky
Cyclical Economic Recovery – the developed markets will see a slow growth recovery while the developing markets with their Mercantile Economies will see above average growth. Combined, investments that focus on this concept combine characteristics of value investing with growth investing – a balance that is successful after the initial stage of an economic recovery
Mercantile Economies – Ludwig Erhard was the architect of the German Economic Miracle that brought its economy out of the depths of its post-WW2 lows. He focused on developing a strong currency, an export driven economy, and repayment of national debt. Applying his economic theory to investing in coming years, the winning economies will be those that follow his economic strategy: Brazil, China, India, Taiwan, South Korea, Hong Kong, Singapore, Vietnam, Malaysia and Indonesia.
Sound Monetary Policy – very few developed economies have weathered the economic crisis with a strong currency, monetary policy and banking system. We focus on three that did: Canada, Australia, and Switzerland.
Inflation Hedge – our forecast is for inflation to become an investment issue in late 2010 given the easy monetary policy in this country. Inflation is a portfolio killer and you have to be prepared to deal with it.
Innovation – given our forecast for slow economic growth in the US, investors need to focus on companies and investments that will grow faster than the economy in general. To do that they must have an innovative product or service that will produce earnings growth in spite of an economic malaise.

Making changes in strategy is a cathartic thing. The themes above – which you’ll hear more about when you read the full analysis in the newsletter – touch on the major factors that will impact investment performance in coming months. As always, we will keep you updated on how things are progressing and provide you with our analysis of both the fundamental and the technical aspects of the market.

In the late 80’s I saw Bowie in concert. It was billed as the concert where he was going to play all of his hits, no new album to promote, and then never play them in concert again. I have to say, it was one of the best concerts I’ve ever been to – lots of energy and everyone singing along with him at the top of their lungs. It was really one big party – but in my late 20’s life was one big party no matter what I was doing.

Return of Trivia 🙂

I know its been a couple of posts since we had a trivia question, so I thought I’d give you a couple of them just for kicks.

First, today is the anniversary of the murder of a famous historical figure. In 44 BC, this politician was killed by a close associate and the act has given us a colloquialism that is used extensively today to mean an act of betrayal. Name the historical figure, his killer, and today’s colloquialism.

Second, David Bowie partnered with a big 70’s band for a song that became a top hit in the UK and (as I saw on a VH1 retrospective of 80’s hits) one of the top songs of the 80’s. The base line for the song was sampled by rapper in 1989 and its inclusion in his record became an even bigger commercial success for him, at least until the lawsuits hit. Name the song, the 70’s band, the rapper, and his song. To give you a hint, below I’ve included a cover of the song by one of my favorite modern rock bands, My Chemical Romance.

I’ll be back more frequently at the blog once the changes to the strategy have been fully implemented.


Happy Anniversary

Tuesday, March 9th, 2010

Today is the one-year anniversary of the 12-year low in the stock market reached on March 9, 2009. The S&P 500 had crashed to a hellish 666 level. A lot has changed over a year, and that includes the factors that have supported the recovery in the equity market (thanks to David Rosenberg for the data points below):

• The market’s measure of fear, the VIX, was 50, not 17.
• The yield on the 10-year Treasury note was 2.9%, not 3.7%.
• The budget deficit was $900 billion, not $1.5 trillion.
• Credit Spreads were 540bps and tightening, not 260bps and widening.
• The Dollar Index was at 90 and depreciating, not 80 and appreciating.
• Oil was at $47/bbl, not $82/bbl Equity PM cash ratios were at 5.5%, not 3.6%.
• Market Vane bullish sentiment was at 32%, not 53%.
• Real GDP was -6.4%, not +5.9%
• The ISM Manufacturing Index was 36, not 57

These pieces of data show that we have come a long way, but nothing shows it clearer than the chart at the end of this Investment Commentary. The chart reflects the market peak in October, 2007, at 1,565 on the S&P 500 Index moving down to the 666 low on March 9, 2009, and the subsequent recovery to today’s 1,138 level. The size of this move from the lows represents the biggest up-move in three-quarters of a century. You can also see that we have recovered a bit over 50% of the entire bear market drop from peak to trough.

The real question now is whether the economy is recovering enough to push the market higher, particularly to our 1,250 level on the S&P 500 which we’ve written about as the anticipated top of the trading range for this stage of the economic cycle. The primary factor in support of higher stock prices are low interest rates and an easy monetary policy by the Federal Reserve. The primary factor that could derail the recovery and send stock prices down are higher interest rates and the Federal Reserve tightening monetary policy. Right now, low interest rates are here to stay (at least for several more months), so the trend should be up. However, if the market gets wind of a move to a hawkish stance by the Fed, we could easily see a correction but it would take a major economic event to move us down to the previous 666 level.

Our strategy for now is to maintain our stop losses (many of which hit during the recent sell-off) and use any cash generated to reposition our portfolios as our Investment Strategy dictates. We will be sending out a full Investment Strategy newsletter in a few weeks that will detail for you our plan for the future. For now, we are staying with our plan to ride the uptrend and protect the downside with stop losses.