Spreading Some Market Cheer

I hope that you all enjoyed your holidays. Apparently you were in a good mood if the latest retail sales numbers are accurate. Of course the comparisons were to rather dismal numbers last year and even more dismal numbers from the year before. But, what is encouraging is the trend. And, when it comes to investing, the trend is your friend. Of course it works both ways.

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The markets soared last Wednesday as though the crisis in Europe and Korea were non-existent. Well, in a way they are. Why all the fuss about Europe to begin with. I know there is a “hype” factor, but the problems in Ireland are nothing compared to problems the country has faced in its past. So a few hundred billion more Euros are going to be printed and probably a few hundred billion more before all is said and done. You read about this contagion and debt crisis in these very pages many months ago. Now that it is coming to pass, the US markets are letting out a big yawn. It’s the holiday season and the markets want Santa to hide the coal this year.

So, why are consumers spending? Unemployment is still high and job creation, outside Washington DC, is still pathetic. Well, in keeping with the theme of a jobless recovery, those who have are spending more and those who don’t are not spending much. But, for those who do have, bargains abound and nowhere is that more evident than the electronics sector, which is showing the biggest gains. In a nutshell, the economy is growing for the “haves” and life sucks for the “have-nots”. If you have children or grandchildren, take this time to teach them the value of education and a work ethic.

The European Contagion

As I wrote recently, there are just three countries left on the target map, Portugal, Spain and Italy. Italy is getting the least attention right now. Spain is number two and Portugal is number one. The Euro is weaker again dropping a further 4% in the past week. The Euro should head lower, back to the low 1.20s to the dollar at the least. It will likely happen during the next non-event, a structured Portuguese bailout. It will come as little surprise to the market though as the prospect of a Portuguese bailout is all but baked in. But, investors will still pull the trigger on the Euro…some things are just inexplicable.

Gold is reacting just the way it should be reacting, but its little cousin silver is off the charts. I know I wrote about silver somewhere in the recent past alluding to the fact that if gold took off, it would be silver that would gain even more. Silver, while more of an industrial metal than a currency proxy, has always walked hand in hand with gold during times of financial unease. As the cheaper of the two metals it has historically outperformed gold, but only after gold has made its run. The all-time high for silver was around $50. Of course that high was contrived by the Hunt brothers who tried to corner the market for silver, and succeeded albeit for just a brief period of time.

But, as the charts would have it, the $50 mark for silver is the “high print” and the metal has a long ways to go to hit that mark. But, it is within sight and with new highs being set already in gold; silver will remain the metal with more potential in the near term.

The US Dollar is also stronger than it was a month ago. Despite the Fed doing all it can to debase the currency, someone still wants to buy it and bid it higher. Talk of a serious attempt at cutting the budget deficit and debt, combined with the Euro crisis and that gnat in North Korea, is all positive for the greenback. Gold and the dollar rallying in tandem…who would have thought?

Debt and Taxes

The next major near term catalyst for the markets will be the state of tax policy going forward. If the Bush era tax cuts are repealed, the markets will react negatively. Right now the markets are pricing in continued tax relief for those earning $250,000 or less. The “richer” segment of the population will pay more. However, the market hates uncertainty and if the government cannot articulate its policy and have it ratified in Congress soon, the markets will make their collective displeasure known. That would indeed provide us with a trading opportunity. In case you missed this: the market is like a poll for the politicians and a shaky market is not a good thing.

This past week the debt panel convened to discuss the proposals to put a dent in the National Debt and the ballooning deficits. For the first time in decades, the panel addressed the country’s out of control entitlement spending. And, lo and behold the populous did not revolt. It should be apparent to all that significant changes need to be made to all entitlement programs. Like the laws concerning spying (which came to the forefront with the WikiLeaks disgorgement of classified documents), the laws regarding entitlements were promulgated at a time when things were different.

The laws for spying were codified after World War I when the Internet was not even a distant thought in one of Al Gore’s grandparents. And, entitlement spending was introduced as a safety net after the Great Depression, but also at a time when there were 16 workers for each retiree…that number is now in the low single digits and the programs in place today are not sustainable. Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes”…we need to add debt to that quote as well.

Best Regards,

Kevin Raymond

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