THE OLD ADAGE OF “SELL in May and go away” would appear to apply so far in May, though we don’t suggest that as a strategy. By the numbers, for the four weeks ended Friday, May 27, 2011, the Dow Jones Industrial Average closed at 12,441, down 369 points, or 2.9%. The Standard & Poor’s 500 closed at 1331, down 32 points, or 2.3%, and the NASDAQ Composite closed at 2797, down 76 points, or 2.6%.
Commodities and metals have been especially hard hit the last few weeks, after peaking on Friday April 29th. In fact, during the first week of May, silver was off 27% from its high. While this sector has recovered some, professional opinions are all over the board as to the future of commodities and metals prices.
Much of this opinion divergence comes from the uncertainty and unknowns associated with sovereign debt. Around the world, including the U.S., nations are drowning in debt. In addition, the legacy or entitlement promises made by elected officials are completely unsustainable. Some politicians, including a few in the states, are finally realizing this. Most of us have known this for years, since we must balance our personal and business budgets on a regular basis.
The challenge is that no one knows how the debt issue will be resolved, or what the fallout will be. What does it look like when a country goes bankrupt? Their currency is effectively worthless, but what other negative results are there? These are the issues that economists and other macro thinkers are dealing with. There is little in modern history to give us guidance. Modeling 10,000 scenarios gives some input. Until we can accurately forecast human behaviour, in large groups and in worst case scenarios, it will remain difficult to forecast with any accuracy. Our estimates, in the meantime, are a combination of quantitative analysis, and the subjective, or qualitative, which is heavily influenced by our worldview.
GM and Ford both posted double digit percentage gains in April. Industry wide, deliveries rose 17.9% from April 2010, with GM posting a 26% gain, overtaking Ford as the leading car seller in the U.S. Brett Arends of MarketWatch is suggesting that Apple will be the first company with a $1 trillion market cap.
Zillow, the real estate information company, shows housing prices down 8% from a year ago. It appears that housing prices are dropping about 1% per month. We have said it before, and it bears repeating. Home prices should be two to two and a half times annual household income. With annual household income in the $52,000 range, average home prices should settle at something less than $130,000. Depending on whether you are evaluating new or existing stock, average home prices are still in the $170,000 to $185,000 range. For the sake of our many friends in the residential real estate world, we hope we are wrong on this one.
Microsoft announced that it is buying Skype for $8.5 billion in cash. LinkedIn, the business networking site, saw its shares more than double on its first trading day, closing at $94.25. This from an initial offering price of $45. Liberty Media has made a $1 billion bid for Barnes and Noble.
Dominique Strauss-Kahn, head of the International Monetary Fund and one time French presidential contender, was arrested and charged with assaulting a hotel maid. His wife, Ann Sinclair, is funding his journey through the courts. Her wealth comes from the art trading of her grandfather.
The G-8 summit ended with a pledge by the member nations to cut debt. This pledge reminds me of a favorite quote, attributed to Molier. “All men are alike in what they dream, and all men are alike in what they say. It’s what they do that makes the difference.” We’ll see what these politicians actually do about the debt they have incurred.
On the economic front, signals continue mixed. Initial jobless claims have been running just over 400,000 each week. Home construction and prices remain soft. The Producer Price Index is up 6.8% over the last 12 months, while the Consumer Price Index, ex food and energy, is up 3.2%.
There is always information to review, absorb, and evaluate. Often, we can allow it to have a negative or depressing impact on our outlook. If we step back and attempt to look objectively, however, life is good. This past long weekend gave us the opportunity to reflect on that. Millions of young men and women, serving through our armed forces, have worked to keep us free. Many have paid the ultimate sacrifice, giving their lives so that we can enjoy the freedoms that we enjoy.
There will always be problems to solve, things that don’t fit with our plans, and outcomes that we don’t prefer. In spite of that, all of us reading this commentary live wonderful lives. I have found that gratefulness and depression can’t exist at the same time in the same person.
Quote of the week:
“In everything give thanks, for this is God’s will concerning you.”
St. Paul
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