September 2011 Newsletter

The Market:

The market as measured by the S&P 500 Index started the month of August at 1286, dropped dramatically into our PWA buy bands and spent the rest of the month there, ending at 1218 for a negative 5.2% return. But that doesn't tell the whole story because it plunged to a one month low of 1119, representing a 16.8% drop, before the S&P recovered a little.

I understand that much of the sudden drop can be attributed to a sell off by large funds via automated computer systems programmed to respond to certain (unknown to me) parameters in stocks. You may or may not know that the 1987 plunge was caused by basically the same phenomena. I thought the SEC took some measures to prevent that sort of thing, but if they did, the solution was only partially successful.

We'll see, but what initially looked like the beginning of a bear seems more and more like a correction. One important indicator predicting bear markets is an inverted yield curve whereby short term interest rates exceed long term rates. For example the yield curve was inverted for about one year before the most recent bear market.

We do not have that condition currently.

Mutual Fund Money Flow

Looking at the most recent mutual fund money flow numbers, for July, we see the following:

	June	July	Comment
Stock Funds Overall	Outflow = 22.9 B	Outflow = 31.6 B	Outflow accelerating
Invested overseas	Outflow = 2.1 B	Outflow = 3.0 B	Outflow accelerating
Invested in the US	Outflow = 20.8 B	Outflow = 28.58 B	Outflow accelerating
Bond Funds	Inflow = 12.9 B	Inflow = 9.38 B	Slowing inflow
Money Market Funds	Outflow = 41 B	Outflow = 118.9B	Huge Jump

The latest data shows money fleeing stocks generally, but more so from funds invested in US stocks, along with a tripling of outflow from Money Market Funds compared to the previous month. At the same time the inflow to Bond Funds was slowing.

One wonders where all the money went. In uncertain times there is always a movement from paper assets to hard assets, such as precious metals, as investors seek "shelter from the storm" and US Treasury notes have also long been viewed as the safest of investments. Certainly gold and silver stocks and prices have done very well in the last year.

You can easily understand why people would pull out of Money Market Funds because the current range of return is between 0.10% and 1.10% with the national average at 0.15%. A ten cent return on $100.00 invested per annum is something less than a great return. Ten year Treasuries are currently paying 2.04%, and two dollar per annum on $100.00 investment isn't wonderful, but it is better than ten cents, and with less risk.

PWA

The PWA 500 Timer entered the buy bands on the 4^th of August and stayed in them for the rest of the month. The MACD converged on 8/16 with the price at 1192, then diverged and converged again on 8/26 at 1176.

The Online Analyzer S&P 500 chart began converging on 8/24 signaling a buying opportunity, but then the bands trend continued down and became more steep so that at this point we would want to wait for the trend to ease before making a buy.

Because the data points are closer together horizontally on the one year chart, it accentuates the trend. So as a trend on one of the charts you use increases slope (either up or down) it's a good policy to switch temporarily to the one year chart to check it. Anything near a 45 degree slope on the one year chart is considered steep and tells us to wait for the trend to ease before purchasing a stock.

Stars and Dogs:

As always, we want to see which stocks and funds did well in August and which were laggards.

Stars:

• (RIMM) Research in Motion, wireless communications, most notably the Blackberry cell phone, produced a 31% gain for the month with the price moving from $24.79 to 32.49 per share. This after a long retreat from a high of $140.00 in the summer of 2008.
• (AEM) Agnico Eagle Mines, gold and other metals, came in with a positive 21.7% return for August.
• (AUY) Yamana Gold, precious metals mining in Canada and South America, came alive with a 20.7% gain.

Metals have done very well recently.

Dogs:

For the month, we had a plethora of dogs-a whole pack of the unruly, feral critters, some more unruly than others.

• (STP) SunTech Power Holdings, a Chinese solar energy company, was the tallest dog coming in with a negative 28.7% for the month. And this is the only profitable solar company on the globe, which sort of makes clear that "green energy" techniques and companies still aren't quite ready to make it on their own in the market place.
• (MGM) MGM Resorts ran a close second for top dog honors with a 27.2% paper loss for the month. They own, build and run Casino resorts and I guess gamblers are harder to find these days what with the economy in America having trouble rising from the mat.
• (HPQ) Hewlett Packard printers, computers, and specialized software, ran a close third returning a negative 26.0%.

 

Recession Watch:

To my mind, the most critical measure of our emerging from recession will be when the jobs numbers begin to change significantly. QE-1 and QE-2 gave boosts to the stock market, but haven't done much about putting people to work. The "stimulus" plans haven't helped much either, in part because the stimulus money wasn't used efficiently. Any time the jobs you "create or save" bear a cost of somewhere between $150,000 and $400,000, you're missing the target bulls eye by a mile. Using the higher number, $400,000 could have "created" ten nicely paying $40,000 jobs rather than one.

A bit of good news is that Jobless Claims have been easing down since May. But that doesn't necessarily mean there are fewer people out of work, because the unemployment rate is holding steady a 9.1%. and many people in the know think that figure is far too low.

• Commercial real estate isn't doing well as indicated by delinquencies reaching new record high level of 9.88% in July.
• Freight tonnage is in a holding pattern but below historic seasonal norms.
• Gross Domestic Product (GDP) at somewhere between 1% and 1.5% is less than half of what's needed to show our economy beginning to move.

 

So while the stock market has preformed well (it's a "leading indicator") not much is happening to cause one to believe we have ever really emerged from the recession.

Inflation Watch

Updating our table of selected commodities, we see that items that increased and decreased for the month was a wash in contrast to the previous month in which the percent of change had decreased two plus percentage points.

We also see that the YOY (year over year) percentage change decreased overall from 49.08% to 43.09%. The indication is that inflation is here, but might be slowing slightly. We hope so.

Commodity Price Change

Commodity	Previous 1 month % change	Most recent 1 month %	Previous 12 month % change	Most recent 12 month % change
Fuel (energy) Index	- 1.80	2.21	39.10	43.61
Food Price Index	- 2.00	-0.71	32.91	25.33
Metals Price Index	- 1.57	2.77	28.89	35.04
Corn	0.64	-3.13	103.14	83.52
Wheat	-7.60	-6.91	107.05	55.18
Beef	-3.12	-0.34	23.17	22.26
Copper	1.51	6.44	39.46	42.96
Iron Ore	-3.51	-1.23	18.97	36.89
Overall, this group	-2.18	0.23	49.08	43.09

 

Overall, the picture presented is still "stagflation" with no real job growth or business expansion, but continuing (maybe starting to slow) upward movement of consumer prices...

Opinion

I'm not happy with Congress these days, which puts me in good company. Some of Will Rodgers best jokes, in the early part of the last century, were about Congress. When issues become politicized sometimes rationality falls by the way side and becomes instead "them against us" with re-election as the goal rather than what has been shown by history to work well.

Currently we have issues about national debt, taxes, and what to do about social security. Now Americans are a very inventive people, and it's hard to come up with an example of major innovation that did not originate here. But there are some tried and true methods of dealing with these issues that have been developed elsewhere.

The country of Chile had a social security system much like ours and, looking ahead, they saw the same problems funding it in the future that we face. The Chilean solution was to allow a privatized option so a worker could set aside up to ten percent of income in a selection of mutual funds rather than rely on the government system. An interesting twist is that the management company is separate from the accounts so if the managing company fails worker account money doesn't go down the tube with it. The result is a greater return for workers (9% average vs. 1%) and this is done at no cost to the government other than oversight. The Chilean program has operated successfully for thirty years and has been copied by several other South American countries.

Not long ago Canada had a debt ridden economy in which entitlements were the order of the day. For example, some people were able to play the system so as to work eight weeks and get unemployment for the rest of the year. The Canadians understood that sometimes the federal government has to borrow money, so they put in place a restriction that for every dollar borrowed, the government had to make six dollars in spending cuts. Canada is currently doing fine, thank you.

With respect to taxes (and government does need tax revenue to operate) there are also some plans that would provide the needed revenue while being a great deal simpler and more equitable. The one I like is the Fair Tax Plan. More about that another time.

The point being that there are good plans for resolving some of our major issues that have been successful elsewhere that our decision makers could tweak to suit our economy.

Speaking of taxes.....

Other PWA News:

We have three new symbols on our current list. They are:

• EZ Corp, Inc (EZPW) a pawn shop and check cashing company with over 1,000 locations in the US, Mexico, England, and Australia. The stock price moves so it may prove to be a good medium term trading vehicle, but the company should also simply do well in our current tough economic times. Not as well when the economy is booming.
• SPDR Gold Trust (GLD) an ETF that holds physical gold.
• iShares 20+ Treasury Bonds (TLT) an ETF investing in longer term Treasuries.

 

So, check 'em out.

In the next few days we will change the PWA 500 Timer chart. We replace the current one, with the same data of course, using the Online Analyzer S&P 500 Index chart. This will permit users to alter the parameters of the chart and the default will be the six month chart rather than the one year chart. So it will look different but users can reset the parameters to the one year chart if they choose.

Final Word:

Right now the market is looking a little uncertain, and many of our PWA charts are showing steep trends, and when that's true, be cautious. It's a good plan to wait until the steep trend starts to ease before investing because a steep trend is a strong indication that the price is likely to move down further.

Wishing you well,

Arley Loeffler, CEO
Investment Timing Software, LLC
arley@itspage.com