Going Global

Through gritted teeth in my best Dirty Harry voice:

"With the U.S. - the most powerful country on earth - dropping in global competitiveness, you have to ask yourself a question. Do you feel lucky today? Well . . . do ya PUNK!"

US Falls Down Competitive Ladder

I for one am looking for ways to hedge the decline of America and broaden my investment portfolio to incorporate a more global strategy. Most investors have the majority of their retirement savings pinned to the hopes of the homeland for fear of what the rest of the world might be hiding. It's a safe bet, sure enough. There's more transparency of information here, we have a stable government, monetary system and strong property rights.

On the downside however, we have a HUGE deficit, complicated tax code and massive legacy payouts due under social entitlement programs. The US dollar, once the bedrock for international trade and finance, has now come under question to remain the world's currency standard.

In the short-term, I'm extremely cautious with my domestic investments. President Obama has proposed some sensible solutions to get the economy rolling again. We would have been much better served, however, if he did so a year ago and not now when the chances of passage before the mid-term elections are desperate at best. Allowing the write off of investments by corporations and extending research and development tax breaks could, if passed, get the unemployment rate down and revive consumer confidence.

Think of the US like a blue chip stock. Sure you need it in your portfolio. But it's more likely to have enormous contingency issues - lawsuits against it, huge pension liabilities, etc. Growth and opportunities are better abroad.

How To Build A Global Investment Portfolio

I'm still a believer in keeping my cash in dollars with plenty still sitting on the sidelines. But my equity exposure will be by country and not by asset class (i.e. large cap, small cap) or industry (i.e. mining, consumer discretionary). Think of each country like a company and invest in those that are run the best and that offer the best value. For my money, the US is just not one of them.

On The Fulcrum of The Seesaw

I was wrong.

Second quarter earnings did exceed my expectations. I suppose companies were able to squeeze even more from overworked employees and suppliers. Sales, however, continue to look sluggish as evidenced by Wal-mart's disappointing results today. With the future so uncertain, companies will not be hiring, or spending much, any time soon. And the status quo will remain.

Here's two interesting statistics for you: Lottery sales are breaking records and Alcohol sales are breaking records

Put them together and call it the Sin Index. Doesn't make me too hopeful about the future. Probably you too if you haven't been adding any money to equity funds beyond dollar-cost averaging into your 401k plan.

So, what's going to give this market conviction? I predict the mid-term elections in November will bring a HUGE wakeup call to Congress. Long-term incumbents will be swept out like yesterday's garbage. Third-party political candidates will have a very strong showing. A stronger approach to attacking the unemployment problem and keeping the economy from sinking further will be developed. And the market should finish the year stronger. But what will happen until then is anybody's guess. It's as if we're on the fulcrum of the seesaw.

From a valuation perspective, the market is fairly priced from a historic P/E (price-to-earnings) Ratio perspective. But that is based on earnings estimates that are fairly rosy. So here's the rub . . . Either you think that company earnings - and from a broader perspective, the economy - will grow by double digits (11%) or more over the next year, in which case you're in; OR you think growth will remain slower, in which case you're out.

As for me, I see the seesaw tilting toward the slower growth scenario. Thus, my cash position remains quite robust (don't get me started on bonds - that's a market for fools right now). I'm betting on the market to fall another 10% during the third quarter (historically the most volatile - see Black Monday, The Great Crash) before I put more money to work. It 's a fool's game right now. And nobody knows the rules.

Is This The Quarter The Cracks Begin To Show?

Larry Kudlow has it right:

Business-Power Neglect

Stimulus hasn't created jobs. Businesses aren't hiring. Banks aren't lending, which has kept inflation low at the expense of business growth. Congress is gridlocked and awaiting November like tourists on the beaches of the Florida panhandle. And consumers are getting tired. Meanwhile, tax increases are looming next year. And state and local government workers are facing the cold reality that they too may join the unemployment line.

The only way out of this mess is to offer REAL incentives for businesses to hire and allow them to write off capital investments more quickly and take an axe to government spending as Reagan did in the 80s. Drastic action is needed now, but it won't be coming.

Bunker down for a volatile earnings season. There's certain to be some disappointments and cautious outlooks for the remainder of the year. The question is what degree this has been baked into the market. I'm waiting for earnings forecasts to come down again before investing more, which could take us to near 1000 on the S&P.

Fear And Loathing In Uncertain Times

The stock market has been behaving like a spoiled child on a sugar-fueled field trip to the toy store. As a parent, it's hard to tell what this brat wants. It's times like these you're faced with two choices - give the kid more candy and ride out their manic energy - or take it away and gird yourself for the onslaught of complaining and unwanted attention from strangers. Regardless of what choice you make, you'll question it.

I've said no to the candy. I won't feed this monster. No sir. Not while it's behaving this way. Perhaps you're in the same boat. 'Retail' investors like us have yet to put money into the stock market. Institutional investors and big bailed-out banks have driven the market with low cost borrowings from Uncle Sam.

Here's one thing I know:

The labor market sucks. I know this from personal experience. When companies are turning down candidates on the basis of being unemployed, you know things are bad.

Out of work applicants need not apply

We're about as unpopular as the referee in the US - Slovinia soccer match.

This brings me to my point. Economic growth requires two things - money and labor. So far companies have been spending little and squeezing every last inch of productivity from their workers. Consumers are getting fatigued. Stimulus is drying up. The housing market is about as stable as BP's leaking oil well. And governments around the world are on the verge of bankruptcy with massive amounts of debt.

US legislators are debating right now whether to continue giving this kid more candy. Feed it some more at least until the mid-term elections in desperate hope that they might still have a job. (I hope they don't)

Like Staff Sgt. Barnes in Platoon, I say it's time to 'TAKE THE PAIN' Half measures like the 'Jobs Bill' or the 'Stimulus Act' are only prolonging the natural economic consequences that our spoiled brat of a financial/regulatory complex has wrought. This market is artificially supported on the basis of the country returning back to average growth. But growth will not come until banks lend more and businesses begin to spend more and hire.

Earnings season is upon us like the approaching tide of oil on the Florida coast and will be met with as much enthusiasm. It's times like these where the only real opportunities are cleaning up other people's messes.

Markets Are Dropping, But Not For The Right Reason

The data I had expected is finally coming out:

Retailers Posting Disappointing Sales In April

Sovereign debt default fears throughout Europe may be driving the recent market "correction." But the real concern to the US economy should be that growth may once again stall and send us into another recession.

Let's look at the facts:
Government spending is drying up:

• No more homebuyer tax credits
• No more government purchasing of mortgages
• Unemployment benefits are expiring

Meanwhile, foreclosures remain high. Unemployment remains in double-digits, when accounting for unemployed and under-employed. Personal bankruptcies are on pace to exceed last year. And now, the consumer is beginning to realize that their own spending must be curtailed.

Since February, I've been warning about a slowdown in consumer spending, which is the primary driver of the US Gross Domestic Product (GDP). I still believe analysts haven't factored this into their predictions for current quarter corporate earnings. I expect earnings disappointments by mid-summer.

Time to stay defensive, with plenty of cash on hand and your equity account stocked with quality dividend paying stocks. My mutual fund choice for long-term holding remains AIM Diversified Dividend Fund, which I own.

Consumer Fatigue Will Weigh Down Market

I don't know about you, but I've been spending less than I did last year.
In fact, my family has had to trim out budget by quite a bit given the employment outlook lately.
We're looking for cheaper entertainment options, not eating out as much, clipping coupons . . . even growing our own vegetable garden to save money.

But there's a bit of false hope in the surging equity markets. Who doesn't like to see their retirement savings growing each day. But is this encouraging some to spend more? Or are they expecting a quick return to the days of old, when unemployment was under 5%?

I'm baffled. Earnings season is again surpassing all expectations. Sales and profits are surging across the board.

I'm confident this can not continue. There will be a day of reckoning this year, when the reality hits these consumers that we're still in for a long-haul and newly adopted frugalities will remain a way of life.

Analysts are forecasting double digit growth in earnings for the current quarter (ending June 30). I think this is the quarter that will disappoint.

Here's some supporting survey data:


Consumers to put spending on long-term diet

Desperation Shopping

I've been puzzled as to why corporate sales and earnings have been driving higher lately despite the massive unemployment and falling housing market in our country. Stocks have been rising with the expectation that sales (and more specifically consumer spending) will continue to accelerate. In fact, since my last post (calling for moving money out of stocks) the market has gone nowhere but up!

My asset allocation, conversely, has been quite defensive. I'm of the opinion that analysts are too optimistic about the recovery of the economy - V-shape, square-root shape . . . whatever you want to call it. It's a fact, though. Consumers are spending more, even with lower paying jobs (if jobs at all), flat to falling house prices and looming tax increases because of a huge national deficit.
I call it Desperation Shopping.

Here is a good article that may explain this dichotomy:

Mortgage Defaults May Be Driving Consumer Spending

Sometimes the Hardest Thing to Do Is Nothing

Yes, I've had money on the sidelines as the market has been rallying the past couple weeks. The urge has been there to join the party. But sometimes the hardest thing to do is nothing at all. So I'm sitting this traders-rally out. There's still too many questions from a geopolitical perspective. And I'm not sold that the consumer is back as advertised. Moreover, retail investors like you and me have yet to participate with scarce money coming into equity funds.

But mostly I'm looking into the future earnings expectations for the S&P 500, and what I can see is some pretty lofty numbers. Going into this summer Wall Street is forecasting a double digit growth in corporate operating earnings, about double what earnings have traditionally grown between the first and second quarters of the year. Let's keep a close eye on Federal Express, which reports earnings on Thursday, for some clue about the accuracy of this estimate.

For now, I'm with Pimco's Mohamed El-Erian, who said today Investors Must Keep Cash, 'Retain Optionality'.

Stuffing the Mattress

We had a slight scare in January with markets diving on geopolitical bond default concerns among many other things. Earnings by most accounts, however, have been outstanding for the fourth quarter and some sanity has returned to the market. The focus lately has been on monetary tightening and specifically when will the Fed raise interest rates and end the flow of cheap money. Low interest rates and a declining dollar were the chief underpinnings of the stock market rally last year. (A stock becomes more valuable if the alternative (i.e. investing in Treasuries) isn't attractive because of the low interest rates.)

I believe we're in for a rough couple months or a year ahead with credit issues being worked out by local, state and global governments. Efforts to curtail the huge U.S. deficit will also weigh on the market, specifically talk of higher taxes and more punitive measures on large investment banks. The wild card will be signs of inflation and the response by the Federal Reserve.

From my perspective the U.S. stock market is fairly valued. Only another superb earnings season for the first quarter ending March 31 will drive the market higher. I do not think this is going to happen. Corporations have picked the low-hanging fruit, relying on higher labor force productivity, cost cutting, discounting and burning through cheaper inventory to boost sales and margins. I don't think this can continue. I think we're in for a slightly disappointing earnings season as the consumer really buckles down in the face of extremely high unemployment and socks away more money into savings accounts. The latest consumer sentiment report was the first sign of things to come.

I'm taking money off the table, specifically overvalued small cap funds, growth index funds and greatly reducing my exposure to Europe in particular. I'm maintaining investments primarily in high quality dividend paying funds. AIM Diversified Dividend LCEIX is a favorite and my largest long-term position.

In addition to earnings, I'll be keeping a keen eye on inflows into stock mutual funds by retail investors like you and me. Nothing spells confidence like putting money where your mouth is.

Into The Fire

Just as this time last year fear has gripped the stock market. We're staring at a 10% correction since the start of January. The latest fear is potential defaults on sovereign debt from countries including Spain, Greece and Portugal. In addition, the employment situation appears stagnating and long-term global growth prospects are waning.

The chances that we will see a wave of sovereign debt defaults is remote given the nature of global finance and the fear among other nations of 'contagion' - or a spreading of the crisis. The slower growth in the effected nations, however, is a real possibility. But even then, these nations only represent a small fraction (about 3%) of global GDP output. The biggest risk is to sovereign bond funds, not U.S. equity holders.

In addition to these headlines, the doomsday prophets are foretelling of a collapse of the real estate market in China, the U.S.'s growing deficit and looming tax increases and local and state government debt issues. All told, these issues will scare even the most bullish investor.

Fundamentally, the markets are driven by earnings, which rely both on access to capital and growth of capital. Right now earnings are growing at a pretty good clip, with companies exceeding estimates by 3 to 1. Investors are betting this will not continue.

I'm sticking with my long-term forecast that we will see continued growth in earnings this year, fears will ease and the stock market will rebound. If I had to call a bottom to this correction, I'd put the S&P at about 950, which would put us at an average price-to-earnings multiple of 15 for last year and the coming year (assuming earnings estimates are accurate). If earnings continue to outperform, I expect job hiring to resume and the market to rally back to above 1200.

Separating Fear From Fundamentals

It's been a rough week for Wall Street, bringing major averages down for the year. A big reason for this panic has been proposed legislation by the Obama administration to crack down on profit-making at big banks and fear that China, the growth engine of the world's economy, is putting the breaks on global growth.

Fear begets fear. So, when investors see 2% drops and read scary headlines like these, they are inclined to follow the herd and sell too. But this is exactly the wrong thing to do.

If you look at the fundamentals of the market, they look great. More than 75% of companies reporting earnings now are beating analyst estimates. They are showing tremendous profitability and top line, revenue, growth, which means consumers were spending more last quarter. Profitability outlooks across major industries also are looking rosy.

Let's break down the two causes of recent market fear. Obama's plan to crack down on big banks. Certainly, this can cause ripples in the market, reduce lending and risk taking. But, look at the recent election in Massachusetts. Obama is losing support and he'll need the backing of Congress to get such a plan through. Who do you think has some of the highest paid lobbyists on K St.? Big Banks. I see this plan as a non-factor and simply window dressing by Obama to appeal to angry Americans who've lost jobs, income, etc. The plan itself does little to penalize the institutions (Fannie Mae, Freddie Mac, AIG) that caused the mess.

As for China, their central bank is tightening monetary policy to slow the tremendous (10%+) rate of growth in the country. Such a move is prudent and necessary. Doing nothing could lead to the world's biggest asset bubble bursting, higher inflation and a debilitating recession in China.

So, I'm using this pullback (and it may last a week or so) to position my portfolio for more buying. I've got puts on the SPY at 107. Right now it's at 111.7. So I'm planning for another 5% correction before I start buying again.

Half Full or Half Empty?

We're in a period of major uncertainty among investors. Half believe the glass is half empty and point to high unemployment, excessive government stimulus (debt) and low consumer confidence. The other half note rising corporate profits, growth in consumer spending and undervalued assets.

For now, I remain in the bullish (optimistic) camp. What's going to drive short term results? Earnings, earnings, earnings! Alcoa is scheduled to kick off earnings season next week and I believe attention will shift from jobs to corporate profits. If my forecast is correct, we're in for another barn burner of an earnings season with profits generally topping forecast. Better still, we'll see growth in consumer spending, which has been weak thus far.

Economists have already boosted GDP forecasts for the fourth quarter (ended Dec. 31) to 4.5%. The key is how much of that figure is generated by the government versus Jack and Jill consumer. My guess is not as much as the naysayers think. Equities will outperform other asset classes in the short-term. I'm sticking with iShares S&P 500 Growth Index IVW as my pick for the quarter.