February 18, 2010 Edition, Volume IV

Inside Signature Update

• The Market –  Corrections and Opportunties
• The Economy –  2010 GDP Prospects and Manufacturing Opportunities
• The Takeaway – Likely to See Equity Levels Rise & Commodities Weaken

THE MARKET – Corrections and Opportunities

The recent ups and downs in the US stock markets may have presented cause for concern for traders dependent on short-term technical market trends, but has spelled opportunity for investors seeking long-term gains.  The DOW, now off of its 52-week high by over 400 points (3.8%) following Wednesday’s close, is nearly 450 points above its early February low.

The market volatility of recent weeks, though in part attributable to political events in the US and abroad and the relative strengthening of the US dollar, has also represented what many consider to be a healthy correction.  The early-February low near 9,900 on the DOW represented a correction of 8% against the 52-week high of 10,767.  Most forecasters were looking for a correction of 7-10%; the 9,900 support level we’ve now climbed back up from appears to have calmed most concerns and opened a clear path for newer highs.  

Why markets appear to need corrections on an interim basis before climbing to new heights is likely more of an emotional safety check for traders than the result of any pragmatic or fundamental cause.  Both traders and investors take comfort, and often find confidence, in a market as they understand that a brief cooling-off period often results in short-term declines followed by longer-term extended gains.  The current market climate is indicative of this behavior and rather than to be feared, ought to be seen as an opportunity to purchase attractive assets at lower levels.

Finally, at the risk of sounding like a broken record, the US Treasury Yield Curve continues to be sharply positive and represents one of the strongest indicators available of future market gains.  Months ago, when the market and economy were both offering encouraging signs, I suggested that this was just starting.  Now, almost six months and 1,000 points of improvement on the DOW later, I’ll repeat the expectation … this is just starting.

 [1]

THE ECONOMY – 2010 GDP Prospects and Manufacturing Opportunities

GDP (gross domestic product) revisions for the full year and 4^th quarter of 2009 will be out soon, and like those of recent quarters, are likely to be revised slightly upwards.  Contrary to what many may have you believe, the US economy is in full recovery mode.  That’s not to say that everything is positive or even to suggest that all sectors of the economy are on solid footings; but it does represent that the financial, manufacturing, retail, real estate, agricultural, financial and labor markets are improving.

The most troublesome sectors of the economy continue to be housing (real estate) and jobs (labor).  Though slightly improved over prior months and quarters, they remain below important levels and continue to cause fiscal and emotional pain for far too many American households.

On a decidedly brighter note, most other economic indicators have not only improved, but have done so for enough back-to-back periods to represent a firm direction and trend rather than possible anomaly.  In recent economic reports, durable goods orders and shipments rose .3% and 2.9% respectively, personal and discretionary incomes each  increased by .4%; retail sales increased 12.9%; employment improved by .5% (though still high at 9.7%); and inventories declined by more than $33 billion dollars.

Perhaps the most important figure in that list is the inventory figure.  Throughout the recession, inventory levels declined as retailers and wholesalers sought to limit their exposure to declining retail sales and reduce expenses.  Virtually every calendar quarter brought lower inventory levels - hand-in-hand with the decrease in manufacturing and distribution jobs.  Surprisingly, declining retail sales figures never resulted in increased inventories and consumers have continued to buy more than was being manufactured.

With consumer spending on the rise, the pressure to build inventory levels is mounting – this accounts for some of the recent employment improvement.  Lower unemployment, however modest, translates into higher personal incomes and increased consumer spending, which in turn puts yet more pressure on inventories.  It becomes one of those positive developments we’ve needed to see for many months.

Some will argue that much of US retail consumption comes from foreign manufacturing, and the production increases that will rebuild inventories will have a positive impact elsewhere but not at home.  Though seemingly rational, that manner of thinking is incomplete and leads to inaccurate conclusions.  Though US consumers purchase many hundreds of billions of dollars in foreign-made goods each year, increasing retail sales and inventory builds offer sufficient US manufacturing opportunities to reverse employment trends and add the jobs needed to return the labor market to full employment.  Additionally, the US market is nearly as dependent on foreign consumption as it is domestic.  As foreign manufacturers increase output to meet domestic needs, their employees purchase US-made goods and services along side of those from other countries.  In fact, the weaker US dollar has increased the proportion of US goods purchased by foreign markets - enough so that our corporations and investment markets have benefited from improved export sales and decreased trade imbalances.

Some have wrung their hands over tightening monetary policy in China; again, what seems rational is incorrect.  China pegs the yuan closely to the dollar and what’s good for the Chinese currency is typically good for the dollar.  Were the US political climate strong enough to allow for tightening at the Fed, the dollar would improve; and in time, the US economy would be stronger for it. 

We now stand to gain nearly as much from foreign manufacturing of goods to be consumed in the US as we do manufacturing those goods domestically.  Though our economy remains subject to uncertainty in some sectors, we are stronger, leaner and more secure than we’ve been in many months.  And that’s worth a 2010 GDP forecast of 5% - 5 ½%.

THE TAKEAWAY –  Likely to See Equity Levels Rise and Commodities Weaken

• Take advantage of market weakness to strengthen equity positions.  Though we may see lower levels sometime this year, we’re more likely to see equity indexes rise and commodities weaken.

• The political climate of a mid-term election year isn’t likely to encourage the Federal Reserve to tighten monetary policy.  The dollar, stronger relative to many other currencies in the wake of the PIGS (Portugal, Italy, Greece and Spain) sovereign debt concerns, isn’t likely to fall prey to domestic inflation pressures.

• Personal and discretionary income gains of .4% may seem insignificant, but when compared to CPI (consumer price index) increases of less than .1% for the same period it equates to an increase in buying power at the household level.

[2] Signature Update is offered by [3] Richard Haskell, Managing Director of [4] Signature Wealth Management  and CEO of [5] Signature Management, LLC