Mid Quarter Update, Markets, Economy and Jobs

Mid-quarter Update ... Ruminations on markets, economy and jobs


It's mid-February, and that signals the half-way point through the first quarter. Most of the popular stock averages are ahead quite nicely, from +6% for the Dow Jones Industrials to 7% for the Standard & Poor's 500 Index, to 8% for the technology-laden Nasdaq 100 Index. That would be a very decent gain for even 6 months from a historical average of 10% yearly return for stocks the last 80 years. The market pundits and tea leaf readers tell us that a "correction" is overdue. Two data facts stand out: the rather uninterrupted 20% rise since Labor Day, 2010, and the doubling of stock prices since the bear market lows in March, 2009. There's an axiom "prices that double often head into trouble"; but I'm not predicting that here today. Our research director's in charge of timing and allocation of funds, and we're generally bullish and invested now. Call me for a free review of your financial situation and goals.

Here in the investment cockpit, we've evidenced a change this year in the market sector performance. The exchange traded funds we monitor and use for our clients now favor those sectors that would benefit from higher prices: energy, aggricultural commodities, technology  and mining namely. The foreign country funds that served us well in 2010 are mostly all negative in our screens now; Peru, Taiwan, Chile, Singapore, Japan: all seemed to catch a cold in mid-January. These markets can change fast, so they could reappear at some juncture. As an example of a narrow-based ETF we're using now; Internet Holders (HHH); a 13-stock basket covering Internet Commerce. When you own HHH, you own 20% in eBay, 42% Amazon.com, 7% Priceline.com and the balance spread among Time Warner, E*Trade, etc. It's an excellent way to participate in this space without buying the stocks. An aggricultural ETF we favor now contains contracts for soybeans, corn, wheat, cotton, soybean oil, coffee and sugar. China announced they may not harvest enough wheat this year for their internal consuption.

Prices higher?

Today's producer price index report shows us - and some would say confirmed - commodity prices are picking up steam, and that could lead to higher consumer prices for us. Consumer prices are released tomorrow morning. Raw material prices including food and energy, gained 0.8% for January, the highest since 2008. Can companies that produce and bring to market our food pass along costs (think Kellogg, Kraft, Archer Daniels) to us in the supermarket? $5 for a box of cereal is a bit much, so I often defer to a healthy alternative or off-brand to get the same nourishment for my dollar. Higher consumer prices will hurt demand and not enable our economy to grow as fast. And the Federal Reserve is not worried about inflation yet? It seems that their dual mandate of stable prices and full employment are not working out too well so far.

Inflation will hurt fixed income (bond) prices also. If you own any, check your statements or ask us for help.

Main Steet vs. Wall Street (it's lack of jobs, stu**d)

Unfortunately, the events in the finacial district in New York, and the prices on Wall Street do not often correlate with the health of the rest of America and the problems and challenges we face economically. Jobs (lack of them) is front and center for Obama & Company. What concerns me is more longer term oriented; how our country is falling behind in smarts to prepare for the new services, technologies and industries that will need skilled labor in the future. I have a rather vested interest in this, as my two teenagers will have choices to make during their working years that could well be determined by how and what they study today.
Consider these factiods taken from last month's Barron's magazine as they interviewed top money managers and economists in their roundtable discussions.

* the percentage of the US population that's earned 4-year degrees has remained stagnant for 10 years.

* if you don't have a degree, you will most likely stay unemployed longer.

* Unemployment for women is 2% less than men, mainly due to the heavy toll manufacturing and construction jobs took during this recent recession.

* the pool of US students studying STEM (science, technology, engineering and math) has fallen dramatically the past 10-15 years.

* Tech companies, whose growth has spurred many jobs in the past, cannot find enough qualified US workers who graduate with these skill-sets.

* 70% of the PhD program graduates are non-US citizens (think Asian, Chinese, Indian, etc.)

* In the 1970's the US has 20 million manufacturing jobs with a 200 million populace; today it's 12 million on a 320 million population. So while corporations are doing rather well with profits and earnings worldwide, many workers are suffering as their incomes are dropping relative to expenditures. Median family incomes have dropped 4-8% in the past decade; and that's measured before the 2008 financial crisis hit us.

So what's my solution - mainly aimed here Generation Y (born 1981-1999)? Continue to learn and acquire new skills after you leave school to be compettive. Ask for help when you don't understand. Raise your hand a lot. Get a mentor or coach. Learn a second language. On this score, my daughter learned French in high school, my niece, Mandarin Chinese, and my son is tackling Spanish and German in high school. His first job in 2018 may be in Munich or Buenas Aires. As for me, I've joined a Spanish meetup group and intend to be fairly fluent by year-end.

My blog today is quite pessimistic, but sometimes we need to worry, because that will prompt changes for the better. I hope so.

Until next time,

Adios amigos !
Barry Unterbrink, CRPC
(954) 719-1151

Year-end notes: 2010

The year end is fast approaching, I want to thank everyone for your patronage to my blog posts and ruminations on the markets. May you be blessed with good health and fortune this holiday season and beyond into 2011.


Financially-speaking, we should have much to be thankful for also. The equity (stock) markets have delivered to us a better than norm year of performance. If the year ended today, the popular stock market averages are ahead 11-13%. Narrower indexes are ahead 15-18%, some higher. So a buy-and-hold investor has more coin than when this year started. Our hard work appears to have paid off for clients too - as our mixture of non-US based ETF's and market timing reduced the "risk" of playing catch-up during the Spring and early summer market sell-offs.

But, it's been a rather rocky road to riches. How so, you say? The above results were garnered with five market declines along the way between 4 and 12 percent on the Dow Jones. First, a loss of 5%, then gain of 13%, loss of 12%, gain of 6%, loss of 7%, gain of 10%, loss of 7%, gain of 14%, loss of 4%, then gain of 5% to end up where we are today near Dow 11,560. Recall that every bear market starts with a 5% decline - and you just cannot predict which sell-off will be the "big one" like the 53% decline from 2007-2009 which many investors are still remembering vividly.

Not to toot our own horn too much, but our exchange-traded investments worked quite well this year. Silver, Gold, single country funds, and lately commodity-based investments like energy, grains and coal have kept us ahead nicely ahead of the market averages, while having a measure of cash out of the market or in bond-type investments.

We can take a page from a professional gamblers playbook here. Gamblers are most worried about drawdown, that is...what's the worse loss they can experience and still stay in the game. The deeper the loss, the bigger hole you have to climb out of ... agree? A 10% loss takes 11% to get to even; a 20% loss takes 25% to even, and a 33% loss takes 50% to get to even. As losses mount, the tendency is to make bigger bets to get whole again...a very risky strategy. Using the example above of the actual markets performance, a 14.4% drawdown was the maximum for this year (late April to July 2nd). By early August you were back to even, and by Election Day you surpassed the high value achieved in late April.

Bonds have experienced ups and downs as well. With all the monetary and fiscal schemes our government has tried this year, the end result has not made much of a difference to the average American's pocketbook or job prospects I feel. Savers and investors really have overlapping 'wish lists" when it comes to fixed income or bonds. Savers hope for high fixed rates to provide a decent income, and low inflation that will not eat that income up when they spend it. CD's, money markets and fixed annuities are favored here. Investors wish for that also, but also desire falling interest rates and a slow economy that will raise their bond investment values. Again, it circles back to price stability. How much drawdown can you afford?

Since early November, bond savers and investors have now become subject to principal loss akin to stocks. Interest rates are up about 1% for long term bonds since mid-September - a big jump. They are approaching the 4.85% high near Easter time. Bonds and bond mutual funds had a terrible November, many falling 5% or more since election day to now. When bond interest rates rise, bond prices fall. Cities and states are in financial trouble, and their borrowing costs are rising as well. Today, we just cannot find many reasonable places to put money to work that is not in stock-related investments - so we'll sit on cash for now until more favorable entry points arise.

The balance between stocks and bonds will work out over time. As bond rates rise, and you can lock in higher yields, say a 5% interest yield, then money should flow from stocks back into bonds; now it appears that stocks are favored.

We don't try to predict the markets; they will usually give signs on our charts as to what's working when trends develop. We'll continue to uncover profitable opportunities to invest client wealth while limiting drawdowns in 2011.

We'll check back with you next month.

Barry Unterbrink
Chartered Retirement Planning Counselor

ETF and market update

  In our last visit late August, we told you about our concentration of our clients investments in the emerging market country exchange traded funds (ETF’s). One reason for our profits in these countries is the fact that the hedge funds and pension fund managers have just recently discovered the opportunities in emerging markets but they had a hard time on how to invest overseas. Foreign objective mutual funds were the only game in town for 50+ years. Of course they know that Apple, Intel, Wal-Mart and GE have some foreign business exposure but many don't have a clue on the midsized companies in say, Brazil. (See Brazil Mid Cap ETF. ( BRF). These hedge and pension funds will continue to pour tens…even hundreds of millions of US Dollars into single country fund ETFs to diversify their client’s money away from an all-USA position. Money they have pulled from the US markets mainly is the supply source.


A more fundamental reason for the superior gains we have seen for our clients can be traced to the urbanization of these countries and the move towards a middle-class type society of consumers in the emerging markets of the developing world. Over 1 million urban residents are created each week in the developing countries. India alone will have 10 million urban residents a year move to the cities for over 20 years. China will have 17 million people a year moved to the cities for the next 20 years. 900,000 Chinese are estimated to be millionaires at years-end vs. 2.9 million here in the USA. China’s population is 4 times the United State’s. The rural peasants and farmers are now becoming lower class consumers. When they become factory or construction workers, and later educated to office workers and technicians their standard of living will increase and their appetite for consumer goods will soar along with the growth of the economy.

Now the subject of slums and the troubles that come with them will have to be addressed longer term, and not every Indian and Chinese will be buying a Mercedes, but the growth of these ETF investments is probably assured in developing countries (include Brazil and Russia too), and we want to be on-board the bullet train for the profitable ride. One last point….and I am not claiming “cause and effect” just a correlation: All these fastest growing economies have little or no taxes and NO welfare systems. County Funds at the bottom of our list are France, Spain, and Greece.

Stock Market Update
We'll the history books were favorably wrong for September and so far this month. The popular stock averages gained 7-10% since late August, and are hitting yearly highs as we go to press with this post. The Dow Jones Industrials had the best September since 1939! 
Country ETF's and our gold and silver ETF's performed admirably during this period. Yields of 3-1/2% to 5.25% are still available in the bond ETF market now; so that's where we keep cash awaiting investment. As we follow the trend of the markets, perhaps we should close the history books and "stick to our kinitting", to what Mr. Market is telling us today. Weigh in with your comments by clicking on "post a comment" at the end of this blog. I will reply to your questions post-haste!

~Barry Unterbrink, CRPC
(954) 719-1151