FEAR HAS DOMINATED DOMESTIC equities over the last two weeks, driven by some combination of the uncertainty coming from Washington, Mideast unrest, and worldwide sovereign debt loads. By the numbers, for the two weeks ended Friday, August 19, 2011, the Dow Jones Industrial Average closed at 10,817, down 627 points, or 5.4%. The Standard & Poor’s 500 closed at 1123, down 76 points, or 6.3%, and the NASDAQ Composite closed at 2341, down 91 points, or 3.9%.
Over the last four weeks, the Dow has given up 1864 points, or about 15% of its value. The S&P 500 has given up 222 points, or 16.5% of its value, and the NASDAQ has given up 417 points, or about 15% of its value. A number of professionals are suggesting this may be the time to return to a neutral weighting in domestic equities, especially as the S&P 500 approaches 1100. We tend to agree.
At the moment, Treasuries and CD’s are offering no income. Gold, silver, and other metals, as well as food and other commodities, have been on a rocket ride. Regression to the mean suggests that these assets are up next for downward pressure on prices. Corporate America is sitting on hundreds of billions in cash, and continues to grow their top line, in spite of the uncertainties both domestically and around the world. It wouldn’t surprise us to see a major upswing in stock prices over the next fifteen months, as we head into the 2012 election season.
The Federal Reserve has said interest rates will remain low until at least mid-2013. The European Central Bank has begun buying bonds, in an attempt to pull Italy and Spain from financial ruin. English Prime Minister David Cameron has said he will consider blocking social media sites, in an attempt to reduce the riots, and their coordination.
Cisco reported a solid quarter, with $11.2 billion in revenue, and $1.2 billion in income. For the year just ended, revenue was $43.2 billion, up 8% over the previous year, while net income was $6.5 billion, down more than 16% from the previous year. The top line is growing, but at the expense of margin. Cash and equivalents year end were $44.6 billion.
Parents surveyed by the National Retail Foundation said they expect to spend an average of $603 on back to school clothing, supplies, and electronics, for each of their children. Total spending on children in kindergarten through 12th grade is on track to reach $22.8 billion. Adding spending on college students brings this total to $68.8 billion.
Gold has been on a tear over the last six weeks, closing within just a few dollars of $1900. Some suggest it’s time for a correction, others are predicting gold at $3000 to $5000 per ounce. Hewlett-Packard has decided to exit the PC market. HP appears to be deciding what it wants to be in the future, with some question about the answer.
Google has decided to buy Motorola Mobility Holdings, at a 63% premium to its recent stock price. Bank of America stock is trading near 52 week lows, with stock prices of much of the financial sector showing weakness.
Recent studies have shown that those who maintained a disciplined allocation through the turmoil of 2008 and early 2009 did better than those who attempted to move in and out of the market.
In economic news, the U.S. trade deficit was $53.1 billion in June. Initial jobless claims were down a bit to 395,000, but still in the 400,000 range, with job absorption still far below that needed to reduce unemployment.
Retail sales were up 0.50% in July, meaning consumers are continuing to spend.
According to the Congressional Budget Office, federal taxes as a function of GDP are at their lowest level since 1950, at 14.8%. This compares to a post-war average of 18.5%. We are not suggesting that taxes are too low, or even where they should be. It is very clear to us that governments collect far more than what is required to run an effective, lean, operation. Our suggestion would be to build a tax system that would have taxes at about 10% of GDP.
In other economic news, the Philadelphia Fed’s report on economic activity showed slowing economic activity, with a few bright spots. Industrial production was up 0.9%, driven mainly by auto production. Leading economic indicators rose 0.5%, the third straight monthly gain.
With the information overload many of us live with, perhaps a useful exercise is to step away, and evaluate our lives in terms of something other than a financial statement. What is the quality of our relationships? Where do we find meaning? Is there joy and peace that’s distinct from a growing portfolio or financial statement? Just a few questions to ponder.
Quote of the week:
“Worship is what we give our hearts to, hoping to receive life in return.”