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Today's Commentary: 07.07.04
Beautifully Broken
Summer has always been a tough time for the markets, investors and writers. Although there is still quite a lot to be joyful for, including national celebrations of independence from tyrannical governments, the hot months ahead look less appealing. But this summer hasn't provided the same jubilant enthusiasm as past displays of pride have, largely because the markets, investors, and writers are finding things less independent of the oppressive and deficit weighted hand of government.
Let's begin with the markets. We are entering into a phase called a "stock picker's market". This is basic terminology for "look out - dangerous curves ahead" and those warnings, if heeded, should not attract the inner gambler in you. Stock picker's markets require research and due diligence, something far too many investors have abandoned recently in favor of guessing.
This game of directional anticipation have kept the markets flat this year - the first half showing little or no gains in the major averages with the exception of the Russell Small Cap which posted a 6.1% gain year-to-date. The DJIA was flat, the Nasdaq was only slightly more impressive up 2.2% and the widely indexed S&P 500 was only slightly better at 2.6% as the first six months that ended June 30. So what now?
Nothing. From the comfort of their backyard barbecues, the investor will take their own sweet time making hay in what many are stressing is an underpriced market. Perhaps in places but the overall landscape is riddled with downside possibilities.
The profits that will be posted this month will continue to dazzle and in some cases, beat those learned estimates considerably but overall, many will suffer the weight of slower sales. Orders for technology are lacking the predicted and heavily cheered for increase in IT spending as the short term interest rates begin to make their slow and agonizing climb to rate normality. That will impact the GDP lowering it from those astronomical predictions in January to a much more realistic and perhaps still slightly enthusiastic 2.5% growth for the rest of the year.
So investors need to swallow, between swigs of of cold beer, a slower growing economy, a rising interest rate environment and the poor employment numbers. The later is probably the worst one to stomach considering these numbers were supposed to be lagging behind the recovery and were expected to gain ground quickly leading to the elections in November. The steep miss accompanied by downward revisions of previous months have left little chance that jobs are being created at a level that will sustain the workforce entering into the markets every month. Those revisions in the previous month's tally has taken the wind out of those slight increases in manufacturing jobs leaving them once again, in the red.
Longer range outlooks are even more disconcerting. As the worry of inflation continues to be cited as the real reason the Fed has begun to raise rates, it is merely a smoke screen. Raising short term rates allows the markets to believe that things are improving. But those improvements would need to come from pricing power. Pricing power should come from demand not because of increased commodity prices. Which means that commodity prices, should they begin to drop would create enough of a deflationary down-draft to give what little power companies had with prices to dissipate. As China reins in their growth and focuses on the accommodating its growing population of capitalists, many commodity prices will come down. When they fall, it will be a result of lack of growth rather than an increase in supply. To much supply and not enough customers drive prices in the opposite direction - down. Lower prices do not lead to higher corporate earnings. It leads to deflation.
Which leaves writers like myself with the grim job of warning those less savvy away from the inevitable. At the same time we will need to stress, and not too often that the adventurous will have little else to do in the coming months but "sit down, strap in, and shut up" because the ensuing ride will be the kind that create that attractive G-force look we all enjoyed as kids. It may not be as enjoyable when, as adults, we realize that there is money involved.
The Blue Money Report
Financial Commentary covering a wide range of topics concerning money, investing, and how it effects the average investor and their financial health.
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