This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Sunday, March 29, 2009

Wall Street not for faint of heart

A bear market is truly something to behold. When the markets decide to change direction, they can turn on a dime and there’s just no stopping them.

In the past week or two, stocks have been on the up and up on good economic news. Headlines driving the market higher include higher orders for durable goods, rising crude oil prices, higher-trending homes prices and existing home sales. Thankfully, unemployment is one of the few categories not heading higher as it seems to be taking a break from its recent surge.

Unfortunately, this market action has led to higher gas prices at the pump, recently topping the $2 mark, and has also been marked by a declining dollar. This is due to several factors. First, as we have argued and the international community is coming to realize, is that government stimulus plans have a price: inflation. Second, while the dollar lately has been a relative safe-haven currency as many international investors have felt the United States would be the first country to emerge from the global economic mess, it seems obvious that their sentiment is changing.

We believe that many investors have been unable to take advantage of this recent rally, frozen in place on the sidelines waiting for proof that good times have returned to stay. As we have often argued, the vast majority of investors (and investment advisers, for that matter) react to market conditions, instead of anticipating. Unfortunately for them, there is no money to be made on yesterday’s news. Investors who wait for proof of good times are sure to end up making moves that are either wrong, late or both. And these investors are in good company. Current estimates have counted somewhere in the order of $5 trillion sitting on the sidelines waiting to get back into the market.

Investors need reminding, as do industry professionals, from time to time, that this business is not for the faint of heart. Traders spend lifetimes honing their craft and can still be humbled by the market in mere moments. The financial markets are not a playground, nor are they a nursery school. Consider it foreshadowing that at one end of Wall Street is a cemetery, at the other is the East River. This is not to say that investors should renounce stocks and bonds immediately, but be aware. And please, consult a professional. It doesn’t guarantee success, but it certainly can’t hurt.

Sunday, March 15, 2009

Bear market or bear market rally? Both good news

March 10 was a good day for the stock market, staging a rare rally. The debate has sparked over whether this could be the end of this bear market or simply a bear market rally. Unfortunately, only time will tell. However, even a bear market rally could take the Dow back up near 10,000, giving investors a reason to remain optimistic, but more importantly to stay rational. A bear market rally would provide proof to the growing number of skeptical investors that the world is not coming to an end, and that this too shall pass.

In addition to regaining investor confidence, a bear market rally would also serve well to help many individuals reposition their investments and major corporations sort out their balance sheets. Given the opportunity, companies could sell some of their recovering investments for cash to keep on hand to start new projects, buy competitors or to be prepared in case things get worse.

Individuals, on the other hand, could liquidate undesirable investments without taking such massive losses, and either reposition funds in new investments poised to recover more, or simply use the cash to live more comfortably through the remainder of this recession. With credit still not having loosened substantially, many companies are still having trouble continuing normal operations without a line of credit. Cash gained from the sale of investments would alleviate the pressure to have a standing line of credit and allow companies to continue business as usual.

As discussed in previous articles, the Obama Administration doesn’t seem to be focused on economy, despite this worsening global crisis. Instead, it has used these dire economic times to justify legislation on new programs; as Hillary Clinton said in a speech just a week ago: “Never waste a good crisis.” That ought to tell the American people a lot about where the priorities of this administration are at. However, more recently Obama finally seems to be shifting his focus toward the economy, mostly because his constituency is abandoning him and his approval numbers are falling less than two months after inauguration.

While we tend to focus on the national news, it is important to keep an eye on things happening locally, and to keep an eye out for good news in this mess. We have just such news. In its March issue, Site Selection magazine ranked Toledo the third best metro area nationally according to development based on the number of new projects coming into the region. The greater Toledo area saw 38 new projects started in 2008, trailing only Dayton and Akron.

To find positive news on a larger scale – say global, we have just one word: China. In recent weeks, China is buying – buying a lot of everything. As we’ve previously stated, China recently purchased multiple mining companies in Australia, as well as an oil drilling company in Brazil. These purchases were made so that when the global crisis subsides, China comes out with the resources it needs to continue its rapid economic expansion. And that recovery may be coming sooner than many think. In fact, the China Association of Automobile Manufacturers said March 10 that after the Chinese government issued tax cuts on particular models, auto sales for the month of February grew by an astonishing 25 percent. This is due in part to China’s newly expanding middle class that has been long-awaiting luxuries they couldn’t previously afford.

Saturday, March 7, 2009

The sun also rises

As this market continues south through its previous lows, the economy continues to slow and unemployment creeps higher, it is becoming widely accepted that this country is going through some severe, unavoidable changes.

People are beginning to accept that their lifestyles are changing, and that an era of easy money is coming to a close.

We must also recognize that this is not the end of the world, and the sun will still rise tomorrow. Recently, many meetings with clients and colleagues have taken on tones that are somber and with reserved optimism.

In our lives, when times are good, we rarely stop to reassess (a) where we have been, (b) where we are going or (c) what is really important. Every so often, some event comes along that prompts us to do just that. Quite often our lives are in need of change. We’ve gotten comfortable. And something in the world makes the decision for us that our lives need a change of scenery; that we need to stay on our toes.

For an increasing number of people, the economic crisis in the fall was just that event. More and more people are being forced to rethink their lives and make changes; changes that they never would have made when times were good, but are now being forced to do so out of necessity.

We believe, not without reason, that we are about to witness the greatest transference of wealth that will occur in our lifetimes.

In recent years, millions of jobs have moved overseas as this country transcended the industrial economy. These jobs never needed to leave. They left because, in our highly educated society, we thought that the wages they offered weren’t competitive. How wrong we were.

Now, almost 10 percent of Americans would stand in line for any of those jobs that they willing exported to countries with cheaper labor. Many of these jobs are going to come back. With the state of things, the United States can no longer afford to have trinkets made in China because we refuse to work in factories.

The shift of wealth that we see coming will be to those who can recognize opportunity in the midst of this crisis. It will go to those who have left their comfort zone, whether or not it was of their own free will. Those who stayed adaptive, learning new skills and keeping focused on the future, will come out of this better off than when it started.

Recently, we met just such a person, who had been let go after working in the steel industry all his life, only five years before he hoped to retire. Yet his attitude could not have been better. He knew that he couldn’t have continued working in steel as long as he needed to in order to retire, so he looked at this as a forced career change. Now, he is looking to utilize unemployment so that he can go to school and become a nurses’ aide, where he can work as long as he wants. Moreover, with an aging parent, he will be able to better care for his loved ones with newly acquired skills.

In a previous entry, I made mention of my recent opportunity to speak with a gentleman who lived through the Great Depression. Now in his mid-80s, he was still as sharp as a tack, and could vividly describe experiences from his childhood. He recalled people coming to his family’s home to beg for food, some without shoes or socks in the dead of winter. Another Depression survivor we have met recalled Sunday dinner: bacon grease spread over a single slice of bread, accompanied with a glass of water. This is why we say that people who claim this is a return to the 1930s truly have no idea what they are talking about.

While Americans are now being forced to reassess their lives, recognize opportunity and adapt accordingly, it is also important to rethink everything that you knew about investing. Unfortunately, the days of the buy-and-hold strategy are gone, and are not coming back anytime soon. Since their peak in October 2007, the Dow and Standard & Poor 500 have given back every bit of their gains since 1997.

That means that if you owned the Dow since ’97, your return on investment would effectively be zero. In real terms, it would be negative, as the cost of living (inflation) has risen since 1997. It is important at this time to completely rethink our lives, from how we prioritize to how we save for retirement. If you feel that you need help in either of these areas, please speak with someone. There are plenty of professionals who are more than willing to sit down and help without charging by the hour.

Sunday, March 1, 2009

Obama, are you reading this?

In congressional testimony, Ben Bernanke stated that the economy was poised to begin recovery by the end of 2009. This claim is supported by a survey of industry professionals released by the National Association of Business Economists, which pointed to the second half of 2009 for recovery, with growth resuming in 2010.

On a traditional timeframe, this would mean the market is set to begin recovery any day now, although employment may continue to get worse through the summer, ultimately improving in the spring of 2010. This would make 2008-’09, the longest recession since World War II, as well as the largest credit crisis to touch our shores since then.

In the midst of so much turmoil in the markets, nothing lifts the spirits like vindication. For years we have shouted that inflation was coming, and after this financial crisis, we touted inflation as the most-likely method for economic recovery. And finally, after a long wait, it is finally materializing.

Labor Department numbers confirm that January saw the largest jump in wholesale prices since July, due mostly to rising energy costs. We have long argued, and maintain that crude oil simply cannot, and will not, stay at current levels. Admittedly, oil was too high at $140/barrel, but it is simply too cheap under $40. We believe the appropriate price, given current conditions, is somewhere in the neighborhood of $70-$80 per barrel.

In light of recent news, here is the way we see events playing out over the next year or so:

1. The Dow finds it bottom within the next month. While a rally may not be explosive, it should come comfortably off its bottom.

2. With energy costs leading the way, inflation is going to rip through this economy like a hot knife through butter. Any investors without inflation hedges are going to experience a massive erosion of purchasing power.

3. The economy will stagnate through spring and begin recovery sometime mid-year although real growth won’t begin until late fall or winter.

4. Employment will continue to worsen through summer, ultimately recovering in spring or summer of 2010.

Some other good news: it appears that someone in the Obama Administration must be a reader of this blog. Finally this new group seems to be learning the lesson that when it comes to the financial markets, talk is cheap. Unlike campaigns, this crisis is no popularity contest and rhetoric simply doesn’t work. Hopefully with this lesson learned, the administration will replace speechwriters with economists and quit throwing wrenches in the workings of global markets.