Sushi Money

We™re traveling around the country this week visiting family and I’ve enjoyed the time off. I was curious to see, at least from the road, how the economic challenges are affecting people. But it™s hard to see that there are any real economic changes simply from the number of cars on the road, or people eating out at restaurants or shopping. If the nation is verging on a recession, you can’t tell it from where we’ve traveled in the western U.S. But it™s amazing to see how high gas prices are in some states! I saw diesel fuel over $5 per gallon for the first time this week. It must be taking a huge toll on the independent truck drives which is a shame.

So most Americans seem to be going about business as usual. Of course some of us have cut back driving, and reduced spending. Even for this trip we have modified our travel plans based on fuel prices. It™s obvious that some of our weekly spending that would have gone towards discretionary expenses such as entertainment or household goods are now being diverted towards expenses for fuel and food.

Yet even with a struggling economy from a national perspective, there™s growth and building still taking place, especially in the commercial arena. While home builders are sitting idle and struggling for sales, the foreclosure markets are heating up. And the commercial builders are still making new plazas and storefronts for mini-restaurants and niche stores.

Is the nation getting ready for the next leg up in the business cycle? In some places it appears that way. But so much depends on where we go from here. It™s kind of like waiting for the other shoe to drop. Will we start back on the road towards growth or do we continue a long slide towards recession?

It’s good to see the dollar strengthening on comments from Bernanke, but not so good to see that Sen. Obama wants to tax the oil companies . All for the national good right? But someone tell me how those costs are not going to be passed on to consumers? Ultimately that will be a tax on you and me.

Economic buzzwords are all over the media these days.  How many ways can we describe what’s happening out there?   Business Week says the economy Looks a Lot Like Stagflation… a word we’re seeing more often.

A dark memory still haunts the U.S. economy: The Great Stagflation of 1973-80, a time defined by an uncomfortable mix of high inflation and stagnant growth. Well, everything old is new again, as they say: A number of recent economic reports point to an early 21st century return of the two-headed beast.

But the Fed Chairman disagrees with that view:

“I don’t anticipate stagflation. I don’t think we’re anywhere near the situation that prevailed in the 1970s,” Bernanke told the Senate banking committee as he testified for a second day in Congress on the central bank’s semiannual forecast.

Since when did economists become so popular anyway?  Well, probably since about 2005 when the housing market toppled over.  But it seems like every third financial article (or blog post!) has something to do with the economy these days, quoting the best (or most willing) of the economists available. Someone making one of the comments for the BW article above says, “I don’t understand why everybody quotes economists so much… they’re always wrong!” Well that may be true, but if you can quote other people being wrong it’s much better than making predictions and being wrong yourself! “Oh my… I can’t believe that guy predicted that… my goodness he was sooo wrong…!”

But the President believes we can avoid a recession.  Wall Street may disagree, but I think its important for him to show a constructive view, not out of any sense of political gain, but to shore up consumer confidence and provide stability in whatever way possible.  We don’t know if we’re really in a recession yet, although the U.S. economy slowed to a near stand-still in the fourth quarter of last year.

There’s too much skepticism these days for me, but I suppose that’s as much a part of the election cycle as it is the business cycle.    Do you know what the average length of a recession is, going back all the way to 1948?  It’s just under 12 months long, or about a year on average for a recession.  Yes we hear people say “This time it’s different…” and “Housing is a bigger factor.”  Could be.  I prefer to believe our nation is a lot more resilient than that.  We’ve been through some pretty tough times and will get through this one just fine.  The economy will just keep moving along, albeit a little slower.  Who knows maybe it’s even pretty healthy and will reform millions of too-big spenders and debtors.

For argument’s sake, if we assume we entered a recession in January, then by July we’ll be half-way through it already. Or maybe not.   Either way, recessions don’t last forever.  If the business cycle is contracting, then it’s going to pick up again in a matter of months.  In another year or two, it should be a whole different ball game.  Think I’ll go out and buy something- anybody for pizza?

The news has been almost all negative lately, continuing to pressure markets toward Bear territory. It looks as if both consumers and investors are afraid… fear of potential recession, fear of credit market woes, fear of housing and mortgage problems, fear of… goodness you name it. But a lot of investment professionals are neutral either way. Where there is fear, there is money to be made- not only to the downside, but also with companies that are attractively priced for long term appreciation. Yet the markets head lower because investors aren’t buying, and in fact keep selling. More supply, less demand. And a lot of folks are concerned that things will get a lot worse before they get better, with some even concerned about global recession possibilities.

But there’s still a debate whether the market is consolidating or about to get worse. I’m in the consolidation camp… I think so much of the negative news is already out and that the markets will turn around sooner than later. And can we start looking at what’s right with the economy instead of how bad everything is? I’m up to my ears with the negative stuff. My opinion means little except to my personal approach to investing, and peace of mind. Markets go up, markets go down. It’s not fun, but most have us have little choice but to ride it out as we’ve done in the past. I think I’m more concerned about consumer perception and how that affects confidence, spending and ultimately the economy as a whole. The economy is still growing, albeit “at a slower pace” as the Fed has reported. It’s no surprise that we’ve been feeling pinched by higher prices for quite a while, and the Labor Department numbers finally show the inflation reality that energy and food prices rose in 2007 by the greatest amount since 1990. The highest gasoline and food prices in over 17 years? No kidding… Seems like I remember a recession around the 1990 timeframe too. But don’t worry- Mitt Romney is going to save the auto industry, textile industry, furniture industry and whatever other economic problems we have!

We may be in a recession, or see one soon. But somehow I think we’ll stay ahead of it nationally. Wall street is urging the Fed to take more aggressive action, and they’ll probably cut rates at the end of the month. Congress is supposedly putting together a stimulus package too, and that would boost the Fed’s efforts as well as consumer psychology. The economy may really be that bad, but combine all of that with a dynamic election year and I think the signposts to economic recovery will become a lot more clear in a few months.

The market has made amazing gains over the past two days, and posts the biggest 2-day gain in five years. Pretty amazing numbers. We’ve been here before, but are we staying for awhile or not? And how many people took money off the table over the past few weeks? No surprise there- with all the financial turmoil many of us have become a little more conservative these last few months. But as I was looking over the market yesterday morning it just looked ripe with opportunity, hence yesterday’s post. Now the financial pundits will really be out in force debating the merit of this weeks market gains.

Through last week the Dow was down almost 10% from it’s high a few months earlier. The Wall Street Journal declared a correction a few days ago, looking ahead at the possibility of another 10% down indicating a bear market had returned. But after the last two days, are we out of the woods, and is the Bear still in there hiding? Sure looks like it, but that financial Bear is a wily creature. A lot of smarter folks than I expect all the negative news to have significantly more impact to the markets than we have seen lately. And a possible recession, meaning that many folks think we’re just not there yet. We don’t have that “feel-good” factor going! With the subprime and mortgage mess reaching a peak in mid-2008, there’s still lots of negative news to go around.

But you know what? I think there’s a whole lot of fund managers and investment firms competing to show some healthy gains for investors. With the hedge fund derivative losses this year I suspect a lot of smart folks are re-examining just what risk means. Maybe some of the good quality stocks are pretty decent investments after all. Maybe we don’t have to go looking for the “next best thing” or crazy combinations of risk in order to show decent returns for investors. Maybe dividends and solid year-over-year growth is not a bad place to be over time. Maybe a lot of folks will return to the fundamentals on stocks.

Then again maybe fear will continue to run amok and the markets will crash. Who the heck really knows where the market’s going? Certainly not me, but I did put a chunk of money in some key areas yesterday that look even better today. Looking ahead I see the Fed cutting rates a quarter point, the holidays making us all feel pretty good, and the election cycle really kicking in for 2008. Maybe we’ll even make more progress overseas, and start bringing some troops home. Some folks see market forecasts intertwined with the election cycle… and a Democrat in the White House next time. I don’t know what that means, except perhaps higher taxes on everything.

Something I do know…. markets go up and down, and change is the only certainty. It’s just the name of the game… a game in which I try to keep madness and the risk of emotions out of the way. Ten years from now my only memory of this day will be this post, if it still exists. Looking back ten years ago, I have no idea what I was doing…. Oh wait! Yes I do remember… I was having too much fun and not saving or investing nearly enough! Sometimes I wasn’t having any fun, and still not saving or investing enough. Now I know better… just keep plunking money in the pot, and try not to get too excited whether the market’s up or down. But up certainly is better than down isn’t it?!

     So what do you think of the market action lately?  Lots of seesaw but I don’t think we’re finished with the all the negatives seen lately in financials.   Enjoyed watching Jonathan Hoenig this morning… the Capitalist Pig who offers insight on the daily market action.  He’s generally pretty negative about current market opportunities, but has a really interesting perspective.  Today he mentioned the Wall Street Journal’s article on pension funds.   Seems some of the largest pension funds in the U.S. are divesting a good percentage of U.S. held stocks and shifting overseas, some cutting domestic stock percentages from 50% to 24% while moving into the international markets.   But as Jonathan pointed out, pension funds decisions are akin to investing by committee.  Just maybe this is an indication of where not to put your money right now.

     Either way, how much international exposure do you like in your portfolio?  I’ve held a consistent 15% to 20% over the last few years, certainly wishing I had a larger stake in retrospect.  Inflows to international stocks and mutual funds over the past year have been increasing at a record pace.  So what to do now?  I’m not going to chase the internation markets at this point- I still like 15% to 20%.  I may miss out on some good opportunities over the next couple of years, but I like the U.S. markets.  Here at home however, the news is pretty darn negative on the U.S. economy with the challenges we face with the credit crisis, housing and financial market prospects, consumer sentiment, the dollar, yada, yada, yada.   The financial news continues to show that many economists and investors are expecting the Fed to cut rates in a few weeks:

“The gloomier mood increases the likelihood that holiday sales, which account for a fifth of retailers’ yearly revenue, will be disappointing. Federal Reserve policy makers and private economists have cut growth forecasts as the housing slump enters its third year and jeopardizes consumer spending.”
“This is a strong indication that consumers are going to pull back sharply and growth is going to be very weak,” said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. “The message to the Fed should be that they need to keep cutting rates.”

    Sounds pretty ugly doesn’t it?  Even still, online shopping continues booming to new year-over-year records.  I guess the brick-and-mortar stores will have a harder time.   But personally, if the stock market presents another 5-10% pullback over the next few months I think that’s a great opportunity to really go long.  I’m sticking with it, and continuing to invest over time.  Maybe I’m crazy… heck, maybe it’s almost the contrarian position to look at stocks in the U.S. markets right now?    I just think ugly markets present many opportunities for a patient investor.  Even if the economy struggles along for the next year, the credit crisis will wane after we get tired of hearing about foreclosures and ARM resets.  Fund managers and financial company managers are going to find ways to increase profits and improve margins.  Gold will probably continue higher, and commodities are still doing well in this climate.  But a year or two from now, the sentiment is going to be vastly different.  I’ll even say that at some point in the next 5-7 years the U.S. dollar will come back very strong to the chagrin of many around the world.   Could be wrong, but I’m not betting against ‘ole Uncle Sam for the long term.    Over the short term?  Think I’ll stick with Mizzou this Saturday against the Sooners!

Only a week before the Federal Reserve’s next regularly scheduled meeting on Septemer 18th and there’s a great debate taking place. Bloomberg reports of division within the Fed over how much to cut the Fed Funds Rate, while other Fed members hint that lowering the rate may not be the best idea. Of course it promotes a lot of discussion by the major media, with most debating how big the interest rate cut could be. The bond market is looking for a more aggressive fed funds rate cut as well. And we may even get a surprise as some think another discount rate cut is in the works. But is an interest rate cut really the right answer, and does it matter? It may not be the panacea for all things, but I humbly offer a resounding “Yes!” Although a rate cut may make little difference over the short-term regarding housing, mortgage and credit issues or the commercial paper market, it will make some difference. More importantly, those issues coupled with a possible employment slowdown are directly affecting the economy at this point. What’s that spell? R-E-C-E-S-S-I-O-N.

All together, if the Fed doesn’t cut interest rates, the risk of recession increases greatly. That’s why I believe they will cut rates, yet Robert Reich thinks the rate cut will have little impact on preventing a recession, with tax cuts a better response to stimulate the economy. Good point (don’t want to begrudge a tax cut for anyone), but I still think the Fed will drop the funds rate as one small step to help avert a looming recession. Besides… it’s not just the U.S. anymore. We are all part of the giant economic matrix throughout the world. With apologies to Neil Armstrong, maybe it’s one small step for the U.S. economy, one giant leap for the global economy. If the economy is at risk they’ve got to do something. Seems to me that’s their job. How much of a rate cut? Until leveling off, the rate increases over the past few years have taken place consistently, in small measured increments. Seems like Fed President Ben Bernanke is a “measured response” kind of guy. If it’s 50 basis points, then they are obviously very concerned about a possible recession and the other factors affecting the U.S. economy. Interesting week ahead… with, as they say, all eyes on the Fed.

Here’s a ten-year comparison of the Fed Funds Rate and 30-year Conventional (fixed) mortgage rate.

A look at the Dow over the past decade as well. Some interesting comparisons, but neither the Fed nor the markets like recessions.

     Okay then.  The market has been down a few days with concern over interest rates, economic growth and potential inflation… bond yields have been rising… and?  Well, isn’t that what markets are supposed to do?  Yes, but it doesn’t make you feel any better to see portfolio values decreasing with the Dow losing over 400 points in a few days.  So normally I just don’t… watch the portfolio decrease in value that is. Instead I look at trends, and if there are a few stocks with a shorter investment horizon I’ll see if I can capitalize on how the trends may or may not affect that particular stock. There is a lot of churn in the markets, especially as institutions and other large investors move through various sectors.  Without that turnover and cyclical events within the economy we would have no market… no movement or financial strategy to work through.  What the heck am I talking about?  I think just the fact that markets go up, they go down, but over time… they grow.  Lots of folks have jobs and specializations in the financial sea of economic progress, and I’m glad there are folks who have made a career out of managing investments for others. 

     I’m not a trader… I don’t sit day after day and react to market swings buying and selling securities and bonds, so I have the comfort of time and a little wider perspective.  If bond prices fall, well then yields rise.   Stocks and securities in one investment may go down, but with proper asset allocation other securities may rise.  With falling values, the market presents opportunities.  It’s healthy for the market and necessary.   We’ll just have to see how far this goes, but volatility may be the watchword in the next few months.  International markets have outpaced much of the U.S. market growth the past couple of years, and that “frothy” speculation has to settle down at some point.   The Chinese market has been selling off lately as well, especially amid the product safety concerns in recent months over many of the Chinese imports such as toothpaste, pet food… who knows what else.  Today we read that the Chinese have fired back at U.S. product safety claiming that health products and raisins (?) imported from the U.S. do not meet Chinese safety standards… Huh?!   Don’t you love it when politics and economics come together?   As one who has spent a lot of time in Asia, including Hong Kong, I can tell you that food and product safety standards are nothing like they are in the U.S.  Quality controls and manufacturing standards are far more advanced in the U.S., Canada, Australia, New Zealand, Japan and Western Europe, and far stronger than most other countries around the world.   Our investment and securities market standards are also far ahead of most other nations as well.  We have much stronger regulation and the checks and balances that serve as the foundation for the primary and secondary markets.   I do keep a portion of my investments in the international markets, but the bulk of my portfolio is carried on board the U.S. economic ship of progress… and  I have a lot more faith that we’ll navigate successfully through the rough economic waters over the years ahead.

     Lots of news out this week and the market keeps rolling along. I’m not sure what to think about the new highs we keep seeing, but apparently there’s new money coming into the markets in force these days. Ron Scherrer from The Christian Sience Monitor via Yahoo has an interesting article titled Dollar Buying Ever Less of the World’s Goods. Interesting that it speaks to the effect of the weak dollar actually helping reduce the U.S. trade deficit and helping the U.S. economy through foreign investment in the U.S. The weak dollar also continues to help U.S. companies overseas because of more competitive price margins. All in all it’s quite a balance to the economy here at home.

Will we have a recession in the next 12-18 months? Many think so especially with the housing weakness and high food and energy prices. But the traditional CPI numbers technically exclude food and energy and have remained tame thus far. But those food and energy costs are very real for most of us… and must be reflected somewhere over time. Yet the markets look strong… for now. Somewhere down the road we’ll see weakness, but hopefully not for long. For now I’m positioned to ride it both ways… not as growth oriented as I could be, but balanced enough for the long portfolio. Actually, should the market reverse itself in coming weeks I’m not prepared or willing to sell anything. I like where I’m positioned, but then again I’m never quite satisfied it seems! For tinkerers like me who tend to want to “improve things” it’s hard to establish a portfolio and not want to make changes for the sake of change. But that is a subtle threshold that, once crossed, becomes a self-defeating process.

For now I’m thankful to see some real portfolio growth over time. For the days when it’s tough to remain patient, I just take out the calculator and look at some long numbers down the road. Those numbers over the years are like benchmarks or goals for me. If I can achieve my goals over three years, five years, and ten years… then I’ll be right where I want to be in twenty or thirty years. And yes, I’ve got a benchmark for that too! In many ways, I’m thankful to have the perspective of the long view. When I want to “do more” I look at saving some money for investing and then explore opportunities. I have a short list of several stocks I’d love to own, but I’m not willing to pay what I view as high prices at this point.

One of Dennis Gartman’s famous rules for investing is to “Buy high and sell higher” because we don’t really know what high or low is regarding price in a moving market. You’ve got to make the call somewhere though. So I try not to tinker, simply rebalancing the portfolio once or twice a year based on my goals and asset allocations, and putting new money to work where it seems most appropriate. Got to have goals though… no matter how small… one step at a time.

“If you don’t know where you’re going, you will probably wind up somewhere else.”

Laurence J. Peter

Okay I’ll admit it… I’m getting more defensive.  I’ve always been an optimist and invest on the Bull side, yet perhaps the kind who likes to “make sure” and check on things to ensure their progress is on track.  Lately however I’ve been uneasy.  Why exactly?  A lot of things. I’m no economist so I won’t roll out a bunch of statistics that, although I enjoy reading, I simply don’t enjoy justifying.  But I look at the same news and data that most amateur investors do, and even though I’ve been doing it a long time all I’m sure of is that nothing is for sure.  So with the subprime mortgage woes, the seesaw economy, the new highs for the indexes, the mideast turmoil, and a couple years of heavy political wrangling before an election plays out… I think I finally decided to get more defensive.  I say more because I’ve already been 60/40 stocks to bonds.  But now I’ve rebalanced my portfolio to about 35/65 stocks to bonds.   I still own eBay because I’ve made some nice gains over time and consider it a long-term investment.  I also own GE both because I’ve had it a long time, and it provides a steady dividend return with a company that is probably the broadest reflection of the economy in one stock I can find. It hasn’t shined in quite a few years, but that may be changing soon. Finally I own some ConocoPhillips because I believe they are well positioned over the long-term in the oil sector and can weather a storm should it arise.  Aside from those stocks I own both Balanced and Growth mutual funds in my Roth IRA with more emphasis on the Balanced funds.  My research on the expected yield of my portfolio ranges from 5% to 7.5%.   The Balanced funds may do much better.  But should we tip into a recession, and should the market reverse itself, I’ll be decently positioned to ride it out.  I personally believe we’re going to see about a 5%-7% return over the next couple of years or longer.  I also believe the housing market is going to take 3-5 years to work through the supply and demand curve, with home appreciation stagnating during that time.  When will I become more bullish?  When the mideast issues become clearer in a couple years… when the election is over… when interest rates don’t go up over the next two years… after the market corrects more than 10% at least twice in the next 3 years… when it stops raining…. how the heck do I know!?  But that’s where I am.  I’ve got to honor my gut instincts.  If I’m wrong and miss out on the next leg up?  So be it.  Something else I’m becoming as the years go by?  More patient.