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, June 28, 2009

Light at the end of tunnel

The numbers for durable goods orders were released June 24 and were higher than expected. This marks the third increase in the past four months, all of which have been unexpected in the market. As a result, the market saw some gains early in the trading day, but, unfortunately, those gains could not be sustained.

However, it’s important to remember that this is still positive news. Demand for production goods in this country is still recovering, and that’s a good thing.

Looking back over the past year, this economy has followed the typical steps in a recession, instigated to some extent by the credit crisis.

First, production demand fell and manufacturing slowly reacted, building up inventory. Eventually, companies had significant inventories and production grounded to a creeping pace. This meant falling prices on big goods (cars, homes, etc.) and higher unemployment has companies cut production.

However, even more important than the past year is what is likely to happen over the next year or two as the recession plays out. As the economy kicks back into gear, companies will work through their existing inventories and production will pick up speed to meet growing market demand. Once demand is deemed sustainable, companies will begin hiring to bring their production back to the target levels they decide based on demand.

So while upticks like the ones seen in the monthly increases in durable goods orders may seem small, keep an eye on the big picture and look for the light at the end of the tunnel. The turnaround may not be as fast as we like, but it will happen.

In the stock market, the Dow Jones Industrial continues to bounce around the 8300-8500 level. After a recovery that lasted several months, the market seems to have run out of steam and seems to lack confidence. Good news continues to come out on everything from home sales to the savings rate, but after a brief jump in the market news seems to be quickly discounted and the market again loses its luster.

This could be due to several things. One is the old philosophy of “sell in May and go away,” the belief being that many big traders on Wall Street abandon positions to take the summer off with their families. However, in light of events this past fall, this seems less likely than the uglier alternative.

The alternate explanation is that the market is setting itself up for a (downward) correction. Remember, that while is Dow is nowhere near its previous highs, it has seen a substantial rally so far this year, approximately 35 percent from bottom around 6550 to its most recent top. Since topping out around 8800, the Dow has stagnated.

The question is where we go from here. Unfortunately, there is a distinct possibility that if the Dow falls through its support level around 8000, we could revisit its March lows in relatively short order. On the other hand, the longer that the market can hold this level, the less likely it is to retreat further.

While it may be hard to see, underlying pessimism in the market is causing it to stutter after the original jump caused by any good news. Thankfully, with each bit of good news that comes out, that pessimism seems to be fading as good-news-rallies grow larger and longer. While there isn’t much excitement in the market, rest assured that eventually more and more investors will regain their optimism, and the exuberance that will follow will be something to behold.

Sunday, June 21, 2009

Saving Toledo

It seems President Barack Obama just can’t get enough control, not even after his well-publicized takeover of General Motors (a.k.a. Government Motors), as well as his blatant string-pulling in the board rooms of the nation’s largest banks (Bank of America, Goldman Sachs). Now, our commander in chief is pushing for even more (official) oversight of the financial system, and greater control of the media.

In case you missed it, ABC recently announced that on June 24 the network will relinquish control of programming to the Obama Administration so it can make its case, without debate, for government-run health care to the American people.

What we simply fail to understand is why the media is so enamored with Obama. We admit we’re just money managers from Toledo; how can we be expected to grasp the greatness of this man? But in all sincerity, will someone please explain to us why this guy is so special in the media’s eyes? What has he done, in his entire lifetime, to be deserving of such attention, praise and adoration?

In the meantime, we continue to watch as Obama takes this country in an entirely new direction. If you think I’m going to cry socialism, think again. No, Obama seems more set on achieving a different goal under the precepts of socialism: fascism.

Consider the following excerpt from Sheldon Richman’s article on “Fascism from The Concise Encyclopedia of Economics,” which begins with Richman’s simple statement that “fascism is socialism with a capitalist veneer.”

“Under fascism, the state, through official cartels, controlled all aspects
of manufacturing, commerce, finance and agriculture. Planning boards set product
lines, production levels, prices, wages, working conditions and the size of
firms. Licensing was ubiquitous; no economic activity could be undertaken
without government permission. Levels of consumption were dictated by the state,
and “excess” incomes had to be surrendered as taxes or “loans.”… To maintain
high employment and minimize popular discontent, fascist governments also
undertook massive public works projects financed by steep taxes, borrowing and
fiat money creation.”

While the idea of Obama as a fascist is obviously one for debate, what we know is this: America’s foreign relations are suffering, especially since Obama took office. As an example, the world’s largest emerging markets, so-called BRIC countries (Brazil, Russia, India, China) and others are seriously considering shifting away from dollar-denominated reserves. Representatives for many of these countries are meeting in Yekaterinburg, Russia, to discuss just such a move. U.S. officials were denied their request to attend these meetings, even as observers.

By now you may have inferred that, personally, we do not agree with Obama’s policies. However, frequent readers will remember that in previous blogs we have stressed the need to leave political preferences aside when it comes to managing money. So while we disagree with Obama’s policies, we can’t help but love the opportunities that he is creating to profit.

Like former President Jimmy Carter, Obama is digging himself into a hole. We know exactly where his policies lead, and we know how we will get out of this, and we know that as a result of his policies, many Americans will suffer. However, knowing the direction he will take means that we can make a lot of money from these policies, just like we made money under Carter. However, those people who aren’t prepared will undoubtedly suffer, just like they did under Carter.

Shifting gears, we want to talk a little bit about the Toledo mayoral and city council elections. Over the past 20 years or so, this city has worked its way into a major rut. This election may well decide the city’s fate. For that reason, these elections are perhaps the most important, and probably the most-watched local elections of this generation.

Due to the importance of this coming election, we want to hear the thoughts of our readers: What would you do to change Toledo? What we’re looking for is not just minor issues like repealing the garbage tax. Instead, we want ideas that could be used to formulate a comprehensive plan to turn this city around. For example, it is widely recognized that we need to attract businesses, residents and money within the city limits, especially Downtown. How could we make Toledo more business-friendly, safer, more fiscally sound, etc?

What we would like for you to do is to e-mail us your ideas. Our hope being that, with the help of Toledo’s residents, our new leaders after this election can put together a plan to revive this city and return it to its former glory. E-mail

Sunday, June 14, 2009

Signs of inflation

So far this year, the prices of 10-year Treasury bonds are down more than 27 percent. Of the various forms of Treasury debt, the 10-year bond is the most closely tied to mortgage rates. In fact, the Federal Reserve has been known to trade in 10-year Treasuries in order to raise or lower mortgage rates when it sees fit. The Fed is obviously losing control of the current situation, as Federal Reserve Chairman Ben Bernanke has stated repeatedly, their intent to keep 10-year Treasury yields low in order to keep mortgage rates down.

The result of this development is that, while prices for the 10-year Treasury have been falling, yields have been rising. Due to their close relationship, the rise in yield has led to an increase in mortgage rates, an increase that is not likely to be temporary. The message is clear: for those in the market for major financed purchases (homes, cars, boats, etc.), borrowing money is getting more expensive. The window Americans have had to buy with cheap money at depressed prices is closing surprisingly quickly.

This is, of course, a sign that the economy is improving. If you need more convincing, look no further than oil prices. Having fallen briefly below $35/barrel at their bottom several months ago, oil has since more than doubled, trading over $71/barrel this morning (June 10). Oil prices are an even better indicator of economic strength due to crudes role in manufacturing and transportation.

However, rising oil prices are also a sign of inflation, defined as an expansion in money supply without anything backing that new money. While the following illustration actually occurs as a consequence of inflation, it is a prime example of how inflation is recognized in the market, as well as the effects on the public:

• Once an economy bottoms, interest rates start to trend back up,

• When financing is getting more expensive, people don’t wait on big purchases, so

• Prices begin to rise as people do their buying before borrowing gets any more expensive.

For the past six months, since the Fed and the White House opened the bailout spigot, we have been watching inflation occur. Money has been created out of thin air to “rescue” banks, automakers, insurers, and even newspapers. The predictions that we make now, such as oil and gold prices rising, are based on the fact that new money has already been created. Based on what we know has happened, there are certain investments that will perform better than others.

The results of actions taken by the government have already been determined, but not yet realized in the market. Now, we play the waiting game. Once this economic recovery advances further, banks will resume more normal lending and much of the new money will begin to circulate through the system (this is called velocity). Once it does, the inflation that has already occurred will begin to be recognized in the market.

Now, the Fed and the new White House administration are caught in a perfect storm with both high unemployment and a coming of wave inflation. If this sounds familiar, think Jimmy Carter; the only question is whether the same fate will befall Obama. While the storm that’s brewing will have serious consequences for the America and its people, those who are invested properly have the opportunity to prosper.

In order to take advantage, we’ve compiled the following list of simple guidelines:

• Look at investments with a horizon of six months or more;

• Find investments tied to hard assets (commodities like gold, oil, real estate), which tend to maintain their value during periods of high inflation;

• We prefer foreign investments, since dollar is set to weaken relative to other currencies.

Investors’ appetite for risk is returning to the market (i.e.: stocks are up, riskier currencies are outperforming dollar and Treasuries are down). However, returns will be selective within market sectors and even specific securities. For that reason, we do not recommend dabbling in stocks; there’s simply too much risk in individual companies, evidenced by the past nine months. We prefer mutual funds for this, among other reasons. Talk to a financial adviser to discover some of the other advantages to using mutual funds.

While we don’t consider ourselves stock-pickers, we feel that we can gauge rather well what sectors should perform better than others. For example, the index of precious metal mining stocks traded on the Philadelphia Stock Exchange (XAU) is up 22 percent year-to-date. The 30-year Treasury bond, on the other hand, is down more than 40 percent over the same period.

The most important advice that we can give at this point is this: Keep contributing to accounts. The market continues to trend higher, and the public needs to be invested in order to prepare for the coming wave of inflation. Those who aren’t may not lose money, but they will certainly lose purchasing power, and as a result will find it much more difficult down the road to maintain their current lifestyle.

Friday, June 12, 2009

Major market turn expected; inflation looming

The last several weeks have seen a reversal, or at least a fizzle, in the stock market’s upward trend. This indicates that, unfortunately, the Dow has become more likely to retest its March lows. Technically, such a retest would be a signal of support for the start of a major turn in the market.

This technical assessment is in direct contrast to the case that can be made for hard assets, where the fundamentals remain strong. Despite the fundamentals, technical analysis of recent trading action points to a bleak outlook for just about every equity and commodity investment available.

This conflict is confused even further if the markets are examined through the eyes of a contrarian. The old saying goes that markets continually try to get as many people on the wrong side of a trade as possible. This means that the market will often fake out investors before changing direction on a massive scale.

The basic message here is “buyers beware.” Furthermore, don’t expect this kind of volatility to be a short-term fad. The kind of market action that we’ve seen lately is likely to last for the next several years. To prepare, you need to find a system that you can handle.

If you manage your own money, it is imperative to your personal health (financial and otherwise) that you find investments with a level of volatility you can live with. If, on the other hand, you prefer the “out of sight, out of mind” approach, find a money manager with a system that works for you.

Most importantly: whichever method you choose, stick with it. Do not simply quit saving or stop investing. We have stated this time and time again, so you can consider yourself warned: We still believe that the inflation that is coming will severely hurt investors who are not prepared, especially those who abandon the markets entirely.

Quite frankly, we’re somewhat surprised that the beginning of this inflation hasn’t yet been recognized. This is because bank lending has not seen the resurgence that we expect. While it hasn’t yet, we have no doubt bank lending will pick up and the inflation that follows will rip through global economy.

It seems increasingly likely that bank lending will increase as a result of all the foreign investment that has occurred in the United States. For example, consider the purchase of Hummer by the Chinese. Once the Chinese decide to expand operations here, they will be taking advantage of still-cheap bank credit in order to do so. This example can be repeated several dozen times over, as numerous U.S. companies have lately been taken over by foreign investors.

The last topic of significance for this week is the newly proposed rule by the Commodity Futures Trading Commission (CFTC) to limit position concentrations in commodities. This means that, finally, the agency in charge of regulating trading in commodities will be monitoring the positions held by market participants and attempting to limit market speculation that can drive the prices of commodities to unreasonable levels, high and low.

Hopefully this new level of oversight by the CFTC will be echoed in other agencies that regulate securities markets, ensuring that they continue to operate fairly and without undue influence from any major players. In free markets it is of utmost importance that everyone plays with the same deck.

Sunday, June 7, 2009

United States on clearance

The big news recently has been GM’s filing for bankruptcy, a move that has been priced into the market for some time now. The former auto giant is being split and sold in pieces — Hummer possibly to the Chinese, Saturn to one of 16 interested buyers.

Interestingly enough, auto sales were actually up month after month, according to the most recent reports. Not only did sales rise, but they did so in the face of oil, which is now more than $68 per barrel on expectations of inflation and economic recovery.

Also up were home sales, despite mortgage rates beginning to creep back up. Mortgage rates are based on the 10-year Treasury bond, whose rate has been climbing recently as investors begin to recognize the inflation coming in the near future. Our advice, to readers looking to take advantage of this market, is to purchase a home soon because neither mortgage rates nor property values will stay this low much longer.

We continue to believe that prices will be increasing in the near future due to both inflation and the recovery of the global economy. We see signs of these things emerging every day.

First off, the Dow has lately seen some volatility around the 8500 level as the market argues over whether it will continue higher or head back south. In recent days, the Dow has broken through the 8500 level and seems poised to head higher.

Both China and Australia are in expansion mode, with particular emphasis on purchasing finite resources (commodities). In previous articles, we’ve documented cases of China buying up everything from oil drilling operations to precious metals mines.

In fact, some of the sellers of these assets are American — case and point: GM. In recent weeks, the U.S. dollar has collapsed in foreign exchange markets, reaching new six-month lows against the Euro.

However, this isn’t entirely a bad event, as a weaker dollar makes American assets — cars, real estate and stocks — more attractive to foreigners, since they can get more dollars in exchange for their respective currencies than they could before.

In fact, since February the dollar has declined just more than 10 percent against a basket of other major global currencies. This means, in essence, that the United States is on sale. To foreign investors, American assets are 10 percent cheaper than they were February, strictly from a currency exchange perspective. Of course, they may be even cheaper, depending on how individual assets have fared since then.