To answer that question, let’s take a look at what’s bad and what’s good. (Yes. There is some good and it will get better. I am no Pollyanna -- I wrote “The Myth of the Summer Rally” back on June 28th when everyone was wildly enthusiastic, all the news was good, and never was heard a discouraging word. A brief synopsis of the article: I disagreed, and suggested some appropriate investments to benefit from the decline I expected.)
So what has come to the fore as bad news since?
Our elected leaders’ failure to understand that Americans are tired of our government living beyond our means. I heard a snippy British critic of the U.S., featured on NPR, state that the failure to achieve agreement on raising the debt ceiling was all the fault of “those dreadful Tea Party people” who didn’t understand that “all politics is compromise.” Those Americans who still pay taxes, or would like to have a job so they could, may disagree with her snobby assessment. It is wink-wink, nudge-nudge “compromise” that has led us to the brink of both solvency and sanity. Some of us may see those freshmen representatives who eschewed getting their very own bridge to nowhere as doing exactly what we elected them to do: Reduce government spending, oppose unfair taxation, reduce the national debt and federal budget deficit, and recognize that the United States Constitution is the basis of our system of government.
Standard & Poor's downgraded their assessment of the United States’ creditworthiness to AA+ from AAA. Moody’s and Fitch decided we were still AAA in their book but, of course, if we continued with the clubby, chummy system of innies and outies (innies being Congress, members of the Administration, the over 1 million special interest lobbyists, and Wall Street banksters, to name a few) they would downgrade us, as well. Gosh, I would hope so.
Those were merely the catalysts du jour. In addition, the other - not-so-cheery - catalysts included:
- The rate of employment is not keeping up with the number of new entrants into the US work force.
- The “official” unemployment rate of 9.1% is a fiction believed by very few. It doesn’t include those working part-time who would rather not, PhDs flipping burgers because they can’t get a job in their career field, those who have dropped off the unemployment benefits rolls, those who’ve simply given up, etc.
- Announced U.S. job cuts rose to a 16-month high in July. On the other hand (or out the other side of the mouth), GE alone has sent 15,000 jobs overseas just since its current CEO, Jeffrey Immelt (who is Chairman of President Obama’s Council On Jobs And Competitiveness) took over at GE.
- The J.P. Morgan Purchasing Managers Index, a leading indicator of global business, hit a two-year low in July. For China, it was a 2 ½ year low and it was nearly as bad for Brazil.
- The U.S. Institute for Supply Management services index hit a 17-month low in July.
- Like the PMI used for much of the globe, the same ISM manufacturing index hit a two-year low in July.
- U.S. consumer spending is at roughly the same level it was in September 2009.
- The University of Michigan/Thomson Reuters index of consumer sentiment fell to the lowest since March 2009. Do you remember the sentiment in the country in March 2009?
- Retail sales are barely bumping along. Did you know that most retail sales numbers include gasoline for your car as a retail purchase? Take that out of the equation and retail sales are even lower!
- Sales of existing homes are at a seven-month low. And yet summer is the time most people are moving and/or trying to sell their house.
- The U.S. trade deficit is horrendous. Of course, it doesn’t help when we ship U.S. jobs offshore, then have to import the goods they make.
Had enough? I could go on, all too easily, but you get the picture: Quantitative Easing was a bust. The Cash for Clunkers program was just another ill-conceived and muddled government giveaway. Wall Street and favored friends like George Soros and Warren Buffett were offered sweetheart deals to help in the “stability” process. (Or re-election process, which seems to be one and the same in some people’s minds.)
So where’s the good news? Where’s the beef?
Well, as rotten a job as our leaders have done, it seems that the American people have been doing the “gosh, this is logical to us” thing. Unlike government, we’ve been paying down our credit card debt and refusing to take on more new debt just to buy “stuff.” As a result, credit card delinquency trends have been moving in a downward direction.
We’ve also decided that, while home ownership is a desirable objective, living within our means might be equally important. So home ownership is down and renting a nice apartment is up. Single-family homebuilders may not like this trend but it’s not as if appreciably more people are living in appreciably fewer dwellings – the population is still increasing and people still need a roof over their head. If they choose a duplex or a garden apartment, or if their financial circumstances force them into that decision, it still takes a “unit of housing” off the market. And the people who are buying are doing so with 20% and 30% down. Housing has already crashed – now it is going from weaker to stronger hands / people committed to holding it through thick and thin.
The US dollar is climbing. That’s not only good news for those who took my suggestion in “The Myth of the Summer Rally” article to buy the PowerShares DB US Dollar Index Bullish ETF (UUP). It means that, even after all the bad news listed above, the world still thinks the US dollar is a good place to be when the epileptic fit hits the Shan. (An ethnic minority I am quite fond of in Burma, where I used to be a military attaché, and who are probably not among those buying US dollars right now, though it is still the preferred currency there rather than the local kyat.) The Swiss franc is quite nice and I’m glad our safe haven Preferred Portfolio mutual fund (PRPFX) has 20% of its holdings in that currency. But if you are going to settle big debts across big distances, the world still, including on days the Dow tumbles 635 points, prefers dollars to francs, rubles or yuan.
US Treasuries have been climbing in value through this entire fiasco. All I said about the dollar holds true here, as well. People around the globe still believe a nation of entrepreneurs with transparent corporate governance, even if we currently have “only” a AA+ rating will tighten our belts as needed, innovate as needed, and throw the clowns out of Washington as needed. So they would rather buy US sovereign debt than Russian or Brazilian or Indian sovereign debt when panic rules "The Street" and the streets.
Finally, the best news of all: Americans are fed up. I wrote our clients and subscribers recently that I have lived long enough to see my nation survive the divisiveness of the 60s, the Presidency of Jimmy Carter, the hollowing out of our military, a previous destruction of our economy, and many more travesties that would have laid low a less optimistic, hard-working, and common-sensical people. We Americans put up with a lot, but when we’ve had enough, we tend to roll up our sleeves, hire a new batch of the best politicians money can buy, and fix the problems that have always been plain enough to us, if befuddling to our “leaders.” I believe we have hit our low point and are now ready to rebuild. The innovation that made America great is not dead; it is merely stifled by a government that wants to do for us what we have always done for ourselves, without paying a bunch of expensive bureaucrats and meddling middle-men in the process.
If you agree with me, there are two steps to take now.
The immediate step -- If you read and agreed with our recent articles, you are already long the inverse ETFs RWM, SBB, SEF, and SH. You are long UUP (see recent article here for an article devoted entirely to UUP) -- and perhaps some TLT as well. I would continue to buy UUP, but all of the others have had quite a run. When the market was at 12,800 I wrote that I believed a correction was due after the July 4th rally I expected a decline that would take us from 12,800 to somewhere between 9800 and 10,600. (10,240 would have been a 20% decline, hence that range...)
Rather than take 12 weeks, however, in only 2 weeks we are now just 200 points from the top of that range. So I wouldn’t aggressively buy any of the others now. Instead, I suggest you place trailing stops against them. If the market rallies and your stops execute, if you are aggressive you might want to re-initiate some of those positions. We may have declined 10 weeks faster than I originally imagined but I don’t see us roaring out of the Dog Days immediately. If you’re not aggressive, raise a little cash on rallies.
Step two – don’t become discouraged! It’s so easy to do if the market drifts sideways or declines further. But Teva (TEVA) at 36 is a steal. Deltek (DGRLY.PK) at 17, also a steal. Penn Virginia (PVR) at 21, a bargain. Encana (ECA) at 23, the same. And these are just today's prices. If we can buy them even cheaper, what kind of good fortune is that?! This summer is a good time to sell less-than-stellar holdings into the rallies and get your powder ready to fire at the truly great companies like these.
As I wrote to our clients just today, this downgrade may be the wake-up call America needs to get our government to start balancing its checkbook. If the current batch of the best politicians money can buy can't do it, we'll fire them and hire a rather different bunch. The old adage is that the market typically looks ahead 6-12 months.
Coincidentally, we're 14 months from deciding who to fire and who to keep. In a couple months, I expect investor sentiment will improve markedly.
Disclosure: We, and/or those clients for whom it is appropriate, are long SBB, RWM, SEF, SH, TLT and UUP. We are in the process of placing trailing stops on all but UUP. As summer wears on, we'll be adding to our small pilot positions in ECA, DGRLY.PK, PVR, TEVA and many others.
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