Applied Investment Technology, Inc.

MAY 2012  Market News

 From  April: attention now on Spain ….. was always on the list of PIIGS due to the usual indebtedness, unemployment (over 22%) & the housing bubble.   ... same problems as Greece but on a larger scale with the injection of cheap money from central banks; banks have loaded up on sovereign debt otherwise referred to as “toxic paper”; puts them at risk of selling & a liquidity crunch. Worst case is an expansion of selling that would re-ignite the European crisis; threat to the survival of the euro would be more pronounced as Spain has the 4th largest economy in Europe; public is in an uproar over the lack of jobs & any mention of austerity is met with threats; China, the anticipated hard landing has sent the Shanghai index to a seven week low & it’s down more than 8% from the March 2 high; how much longer can the Fed keep markets moving higher as they try to keep the boot on interest rates. ...there is no money going into stocks but the market keeps going up; money clearly has to be coming from the government to the horror of the interviewers; October of 2011, Bernanke said the purpose of QE1 & QE2 is to raise asset prices; markets have gone up because the Fed has been “manipulating” the market.    Biderman believes as do many others (outside of DC) that eventually the phony money will no longer prevail; Emerging markets have pretty much stopped buying dollars, & China has cut back dramatically; phrase “backed by the full faith and credit of the US Treasury” appears to have lost it’s privileged place. In the last 30 years people have gone from calorie insufficiency to calorie sufficiency;  the huge increase in wealth & calories put a lot of money into real estate &  equity markets; boosting both dramatically; we are in the unwinding process; usually takes 13 to 17 years to work off the excesses that all booms create.  We are still not through year five; Per the WSJ, “conventional wisdom that nearly infinite demand exists for US Treasury debt is flawed & especially dangerous at a time of record US sovereign debt issuance”; 2011 the Fed purchased a total of 61% of total net Treasury issuance; unsustainable & it gives a false notion of demand, & a distortion of the urgency to reduce our budget deficits; Net issuance of Treasury securities is now 8.6% of GDP; more than double the pre-crisis historical peak; the private sector & foreigners have been less willing to purchase the US Treasury debt; points to the Fed as the subsidizer in chief of the US government spend & borrow policies; longer the officials fail to normalize the markets & curtail the huge deficits, the more our economy & markets are exposed to risk of a sharp correction; financial markets react rapidly & take most by surprise; to correct — the Fed will have to wean the Treasury off the subsidized spend & borrow; & lure other buyers back into the market; this will require higher interest rates, which will increase the cost of servicing our massive debt. it’s not likely the Fed will change policies before the election & will do QE3 or another Operation Twist when the current exercise terminates. China — real estate deflation taking place; building boom was ongoing in China in spite of the fact that most newly constructed facilities or houses remain unoccupied; has resulted in a fall in prices; taking a toll on the Chinese economy; recession in Europe is spreading; Germany saw retail sales volume shrink 1.1% in Feb; contracting in 4 of the last 5 months; serious debt problems in Spain, &  Portugal; talk of the need for a third bailout for Greece. recent data:  Feb. personal spending was above expectations at .8%; best gain since Aug. ’09; personal incomes were soft & income fundamentals remain dismal;  income came in at +.2%; not even enough to cover the cost of living; Jan.—Feb. were revised lower; real disposable income declined by .1% — 3rd decrease in the last 4 months; Chicago PMI came in below expectations in March; employment index fell from 64.2 to 56.3 — the largest drop since April ’08 & down in 2 of the last 3 months; Friday nonfarm payrolls number was a huge disappointment; gain of 120,000 jobs; of that 120,000, the BLS birth/death addition was 90,000; RATE of unemployment fell to 8.2% only because another 164,000 people left the labor force; details from the report include (A) average hourly earnings rose .2% — a decline from the .3% gain in February (B) the workweek fell slightly to 34.5 hours from 34.6 which means the aggregate hours worked declined by .2%; first decline in this proxy for output in 7 months; (C) wages & hours worked cuts the avg. weekly earnings so household incomes & spending are under pressure as commodity prices continue to rise; Retail seems to be bracing for a slowdown with a cut in their workforce by 33.8k in March; followed a cut of 28.6k in Feb; Mfg. was the bright spot with a gain of 37k jobs; offset by a reduction of .7% in the factory work week; reduction in temp agency hiring of 7.5k after an 8 month string of gains; only 3.6 million of the 8.8 million jobs lost during the recession have been recouped (41% of the wreckage); Clearly the FED has not succeeded at fulfilling the employment side of the mandate which has some calling for more action; Operation Twist ends in June; Fed has held back on announcing more easing (QE3 or more Operation Twist). Operation Twist was designed specifically to help the housing market; how well is it working? Shadow Inventory coming in 2012 is going to have an enormous impact on the housing market; “robosettlement” has unclogged the foreclosure pipeline, which means that banks can foreclose again; shadow housing inventory that is larger than what the NAR reports, is about to get unleashed on buyers; supply curve will shift as 9 million new properties slowly appear on the market; many will no longer be able to live mortgage free; many in actual foreclosures have made NO mortgage payment in two years.   About 7 million properties are: (1) 90+ days delinquent  or (2) in the foreclosure process or (3) bank-owned real estate or (4) current but underwater.  Roughly 12 millions Americans who “own” their home owe more on the property than what it’s worth; as more homes enter the pipeline there is no reason to believe that the demand curve will rise; housing prices continue to fall; no housing bottom until the shadow inventory or the 9 million excess homes clear; where will demand come from??  ...boomers & older Americans are downsizing when possible; Young potential buyers are often saddled with student debt, credit card debt & low wage jobs making them unlikely candidates for a home that requires a down payment; Banks control a large part of the inventory, short sales, & foreclosure sales & are pressured to reduce principal but are reluctant because every bank asset is another bank’s liability; Banks are more likely to foreclose & release the homes onto the market; meaning…another dive in prices; only salvation would be a sudden expansion of jobs with sufficient wages to support home prices. two themes at weeks end: (1) The “déjà vu” in 2012   (2) Problems growing in Spain; “déjà vu” — it would appear as though the early part of 2012 looks like 2010 and 2011; start with a bang, only to fade; too early to know if 2012 will see another round of Fed rescue; last weeks FOMC minutes put a damper on this notion but as I have repeatedly said, the election will dictate that all stops will be pulled out to make sure the markets are healthy going into November; CRB has also broken down & many believe gas prices have hit a peak; Dow Transports are faltering which is in spite of lower gas prices ahead; a clear sign of reduced growth expectations; recent rally in Treasury prices (w drop in yields), suggests bond investors see the economy losing more steam even though Operation Twist is not due to end until June; more than 70% of the economic stats over the last month have surprised to the downside. NFIB small business sentiment index saw its 6 month winning streak hit a wall in March; hit a 4 month low; quick bullet points in the NFIB survey: All the credit measures have deteriorated: borrowing fell, rates increased, credit got harder to obtain, sentiment over financing needs being met fell & fewer saw credit conditions easing in the future; Access to funding is in reverse which means less working capitol for small business; Jobs openings index slipped to the low mark of the year; hiring intentions have eroded steadily since Nov. 2011; Plans for expansion have hit a 5 month low and capital commitments is also slipping; hence inventory components are weakening; Small cos. are trying to improve margins by lowering labor costs; wages are stagnant & plans to boost wages have fallen; this does not happen in a tight labor market; Real sales have slumped to a 4 month low & the top concern of small business is “poor sales”. —Spain.  problems there are worse than the public data has revealed due to the previous government tendency to “cook the books”; actual Spanish debt to GDP ratio is closer to 90% versus the 60% reported; even higher if you count all the local govt debts guaranteed by the federal govt.; Spanish banks are seriously underwater; if the housing market responds to their bubble as the US market did, valuations will drop 50%.  they built one home for every new person as the population grew. Unemployment in Spain— 23% youth unemployment is over 50%; Spanish tax ministry, “Spain led the loss in the number of self-employed workers in Europe in 2011…..  Seven out of ten self-employed in Spain do not employ anyone else.”; consensus is that Spain is too big to fail & too big to save; ominous when the German Bundesbank is saying “NO MORE” bailouts on the part of the ECB; to markets across the globe - the local problems have global consequences.  Elections in France are important because the outcome will impact the entire continent; Hollande is promising to avoid the austerity measures being imposed by the EU, or more specifically, Germany & Sarkozy intends to follow through; problems in France are typical of the rest of the EU & the US; delayed the reforms needed & failed to rein in the welfare benefits, union demands; the results have been a loss of competitiveness; Germany has stabilized their labor costs.   France  has a large public sector, & their banks are heavily exposed to surrounding economies debt woes.  Being the most heavily exposed, to the surrounding countries with debts, they must continue to have a good relationship with Germany since they are the largest relief guarantor in Europe.   Elections have consequences!  subsidy of the energy markets — subsidy per amount of electricity produced  (subsidies can include federal, state, local, & utility companies); 4 top recipients are wind, nuclear, coal & solar.  Coal equates to 64 cents per megawatt hour; nuclear is just over $3 per; wind subsidies are a shocking $56 per megawatt hour, but that’s a bargain when put next to solar (& this is only Federal subsidies) — which come in at (drum roll) $775 per megawatt hour!!  This says a lot about the current WH energy policy (or lack thereof) their total disregard for taxpayer money & puts the big lie to the notion that cutting spending is not feasible in the current economic malaise!  question continues as to whether we will be able to avoid a recession this year; Europe is in a recession & their ongoing financial crisis does not appear any closer to a permanent resolution; loan of 1 trillion euros by the ECB had a short term affect; only added more debt to the 4 countries that still have a AAA rating; area of vulnerability for the US is with our banks as they have 25% of their foreign exposure to the Eurozone; slowdown in China has affected the commodity exporters, such as Brazil and Australia, along with their currencies; On the plus side, the lower commodity prices should help profit margins of US producers; they can pass along base price increases to consumers; might make the producers happy but I doubt the consumer is going to be thrilled!  no chance that the GOP will hold all three branches of government after November which means that any laws passed to get the economy moving will either not get out of the Senate or will stop at the WH. Ultimately the price will be paid for all the wasteful spending & lack of discipline, but not until there is no turning back;  FOMC held to the policy stance of a Fed funds target of 0% or less, (since 2008 & to continue through 2014); Bernanke said the Fed will be ready to assist if there are further signs of an economic slowdown; ECB states that there will be no further easing (LTRO) in spite of the fact that the European sovereign debt crisis has deteriorated. FOMC was divided as to maintaining the ZIRP policy through 2014, putting the threshold for more stimulus very high; Treasury yields lower with the 10 year under 2% again to 1.93%; NOT a positive statement for the economy; Bernanke knows the “recovery” is weak & vulnerable but stimulus near the election will be seen as political; I doubt it will stop the Fed from doing all it can to bolster the re-election of this WH, without regard to how it is viewed; first QTR GDP number that was nothing short of dismal;  2.2%, the GDP came closer to the 1.7% for all of 2011 than the 3% for Q4 of last year; strength was in consumer spending (up 2.9%) versus the decline of 2.1% in business investing; a forward looking indicator which is to say that the decline is not positive; consumers can’t continue the pace because disposable income is up only .6% in the last 12 months, already absorbed by inflation in food & energy; car & truck sales were up; added a full percentage point to the 2.2% GDP.  repeat?? not when income is not growing sufficiently, & consumers are drawing down savings to support their spending; decline in government spending — was down 3.1% the last 3 months; Keynesians are lamenting this because they have only one answer to growth….  Spend taxpayer money!  GDP has grown by roughly $600 billion over the last year but federal debt has grown by $1.3 trillion; A debt & spending demand driven “recovery” has little staying power but the WH continues to reject supply-side policies; the tax increases coming at the end of the year are paving the path to the “cliff” that is inevitable when 2013 arrives, absent drastic policy changes; Gridlock will be the most likely outcome of the November elections, followed by a lame duck Congress; Markets this week were all about earnings and paid scant attention to the negatives of unemployment claims, low GDP, more stress in Europe and an FOMC that continued to demonstrate their doubts in this anemic recovery. As Bob Farrell (formerly of Merrill Lynch) said…..  “When the experts and forecasts agree, something else is going to happen”.  This famous rule #9 was cited as a result of the Barron’s roundtable front cover that said: “Outlook: Mostly Sunny”………..

Saturday  May 5th

Before I get into the topics for this week….. The WSJ had an article on the USPS  —- the article started with a great quote from Reagan: “only in government is failure rewarded with more money”.   And to that we should add promotions and bonus cash!  A truly pathetic statement about the corruption in DC!    Some keys points are: the PO is losing $25 million a DAY and by 2013 the PO will not have the money to pay its more than 500,000 employees.   The postal service team has come up with a plan to save money and on firmer ground for now, but our esteemed Senate will not allow them to enact the plan. 

The PO wants to close roughly 3,000 offices, relax overnight delivery standards and end Saturday delivery, along with changing the “absurd no-layoff labor contracts” (obviously to save the huge cost of labor); the Senate has denied all of the above and given them another $34 BILLION;  the PO already has $45 BILLION of unfunded liabilities in its health care accts. as well as a $15 BILLION loan from treasury.   This boils down to one item…. Unions and the money they give to the left during an election year!  

Since I am on the topic of bleeding the coffers dry, Social Security funds are next on the hot list!   As we know, the boomers started retiring last year with about 10,000 a day expected to retire for the next 19 years!   All the nonsense from the WH aside, the problem is with “real” employment.   The issue is whether the economy is creating jobs, and the quality of jobs.  According to the NFIB survey, the jobs being created are lower income and/or temporary.  Since SS is calculated as a % of income, lower wages produce lower contributions.  The stats at the BLS show that “contributions” have decreased by almost $70 BILLION from the peak . 

Even worse than the low wages, low contributions, etc. is that a larger share of personal income is from government benefits and they don’t pay SS contributions.  Since the collapse, the support of personal income that comes from Government (taxpayers) has gone from 25% to 35%.   Mind you, this does NOT include the 45 million plus who are also getting food stamps.  It’s obvious that the bottom line does not look good since the money is drying up, the payroll tax cut has sped up the use of funds, assistance is continuing to spiral out of control and soon SS will be using more from “general revenues” to meet the obligations. 

Boomers that are heading into retirement did not produce enough children to replace themselves which has contributed to the shrinking pool of workers who are contributing.  When you add that to the serious employment problem as in the lack of economic prosperity, the crisis will come to a head much sooner than was predicted.  Big Surprise!!  The entire social framework is headed for collapse and no amount of wishful thinking will change anything.  If the spineless in DC do not take the necessary action there will be no good choices left.

While on this uplifting area of fiscal calamity….  Another phrase that has surfaced of late is “the Fiscal Cliff” which refers to the 42 tax benefits that will end on 12/31/12.   The estimated “drag” on the economy is roughly 4% on GDP as a result of the reduced spending from the loss of tax benefits.   The math is simple since the economy is sputtering along at around 2%, a drag of 4% would result in a negative 2% and that would be a big recession.   Bernanke has already stated that the Fed has NO ability to offset the impact of this “fiscal cliff” so he has taken early leave on this disaster.

Government spending can’t do anything but add more drag since they already spend $1.50 for every $1.00 brought in.  Interest payments on the debt are already at record level as a share of total revenue as well as debt to GDP.   This also slows economic growth and that leads to another serious problem in the US —- deflation.  Yes there is inflation in commodities but in all else there is deflation which impacts income, real estate, consumer spending and the economy as a whole.  Our growth rate is too weak to offset the slack which is why some still believe that QE3 is coming…  just a question of when!

A lot has been written and said about the widening gap in incomes and prosperity with no real solutions coming from our fearless “leaders” in DC.   Without pro-growth policies the devastation of the deleveraging will continue, which means the income disparity will get wider and public angst will intensify.   As long as we have excess unemployment, wages will be suppressed which is a huge problem because the impact is felt throughout the economy…..  Housing, spending, sales, savings, etc.  There is no upside to what is taking place in the anemic pace of the so-called recovery and unless the folks in DC get a handle on things, we are doomed to continue down this path. 

As for the markets…..  After new highs were reached we are once again testing mid channel and lower channel bands, depending on the index.   We’ve reached a potential tipping point  because if the lows do not hold, it will be time to exit and await the resolution of the correction.  At present we have merely bounced around in the trading range but should the economic data get significantly worse, markets could correct further and do real damage.   The contrarian view of course is that the bad data will speed up QE3 and that will be a huge positive for the markets as the money pours into the indices.   I expect the Fed will hold off awhile as Operation Twist unwinds and until we are closer to the elections.   It would not be good for them to act too quickly and peak too early!!

All one big political calculation….  But then what isn’t these days??

FRIDAY  May 11th  

The foot note to last week’s update stated that I would cover a few of the details from last Friday’s non-farm payroll jobs report, which of course was a disappointment, as the gain was only 115,000 jobs.  Gains were in manufacturing, retail, services, hospitality, health care and finance.  Losses were seen in construction, transportation& warehousing, information & government.  The most interesting stat was that 70% of the job gains came from bars and restaurants, temp firms and retail.   This is not the strongest foundation for long term growth!   Another item of note is the “diffusion index” which suggests that the job market is still growing but the breadth has lost momentum.

The longer term labor force picture is not healthy with total household employment down by 4.4 million since the recession began in Dec. 2007.  The number of UNemployed is UP by 4.9 million.  The civilian population is up 9.6 million — but the labor force is up just 447,000.  Those counted as NOT in the labor force is up by 9.2 million, while those not in the labor force and wanting a job is up 1.7 million.   To simplify the stats —  a mere 5% of the increase in the adult population over the last 4 1/3 years has found employment.  The other 95% are not in the labor force! 

And of course we know that the RATE is going down because of the massive numbers of people leaving the labor force.  One final note on the April job numbers is that the birth/death addition was a WHOPPING 206,000 which is to say there was no job growth in April.  So much for the recovery as many articles continue to point out!!

Moving along to another item that I would count in the “why would you want to be the president under these circumstances?” — Standard & Poors has announced that in the next 4 years, there will be a minimum of $30 trillion in companies’ refinancing needs related to maturing bonds and loans; further…… they expect $13-$16 trillion more debt will be required to finance growth.   YIKES!!    How this will affect the global markets, credit overhang, deleveraging, quality, etc. is certainly an unknown but it’s safe to say that central banks have less flexibility to deal with market chaos.   This massive refinancing poses significant risk to the US and Europe, with 30% of this $30 trillion is for European financials & corporations. 

Reverting back to the jobs news of last Friday, another more important number got very little attention.  That was the number of Americans applying for disability, which in April was +225k.  This is viewed as the new “stealth stimulus”!   In 2011 nearly  one million applied for disability and year-to-date 333k have actually enrolled, & that covers 539k family members.   Since Obama took office more than 5 million people have been added to the disability rolls.   It would seem that the 99% have found a creative way to “milk” the system & turn the economy into a quasi welfare state!    With this latest creative way to milk the taxpayers, why would the unemployed be inspired to look for a job?  As I have mentioned many times, the BLS numbers are an inaccurate representation of the realistic unemployment, considered by many to be 20% or even much higher.   

Markets this week took some hits from all sides but Europe was a big catalyst.   As one article stated, Europe is a mess, politically, economically and fiscally.  That about sums it up!!  The LTRO (like our QE) was a short term life line but it also tied the banks more closely to the government bond performance —- as we have seen in Spain and Greece.  Since both LTRO and QE are failures, the question is how will any country “grow” their way out of their deficits, since nothing has worked to date.  Too much appears to be riding on Germany and their economy is starting to soften and the polls show less support for Germany to provide a backstop to the EZ.   There is a potent situation brewing in Europe — financial insolvency, economic fragility and political instability. 

The new French leader, Hollande wants to adopt a growth strategy (versus austerity) while credit quality is eroding and that impedes borrowing.   Ought to be interesting!   So we have new French leaders, after the Dutch government collapsed, and ruling parties have been forced out in Ireland, Portugal, Greece, Italy, Spain and the Netherlands.   Bottom line is that Europe has more uncertainty, more volatility, and will be more risk averse in the future as there is further deterioration in government financial strength.  

The markets are lower but the percentage is small and the trading range continues.   So far the advice still leans to “buy the dips” but that advice will change quickly if the data does not turn positive to support the bullish mentality.  Consumer sentiment seems to be improving and the inflation reading today was good news but of course a large part of that was the price of gas finally going lower.   Next week has already been tagged as “Facebook week” but since the IPO does not begin trading until Friday, the action of the early part of the week will depend on activities unrelated to Facebook.   

Portfolios are all holding large amounts of cash that will be defensive should we begin a more corrective phase. On the other hand, I firmly believe that the Fed will have no choice but to embark on QE3, or a similar program of easing because the economy is muddling along and those who are still trying to work and be responsible are concerned about the future.   The summer is likely to be a typical slow grind until we get closer to the elections and then every effort will be made to shore up the markets.   Translation:  more easing, more debt & rising stock prices.

FRIDAY  May 18th

So far Facebook week is being called Facedud -  Facefade and I am sure there will be more creative names applied if this hyped IPO does not do better from this point forward.  Suffice to say that the IPO came close to breaking the initial price all too often and the underwriters were committed to supporting the price which translated into them buying a LOT of shares after it opened.

At this point the real focus is on what took place before today’s IPO and that was once again the problems in Greece.  As mentioned last week, the LTRO was a short term stop gap that only delayed the decisions fraught with political & economic risk.  In short there are four options:  (1) status quo which is more austerity and economic reforms as laid out by the IMF and the EU.  The risk in this option is never ending recession, debt and growth that falls faster than output.  This is a political disaster and the hard left, anti-austerity party is leading in polls.  End result would be a Greek government with extremist parties….  Not a rational choice.  (2) stay the course until Greece has a primary balance—fiscal balance before the interest payment and then default or at a minimum, renegotiate the program with the IMF and EU.  The risk in this option is that the austerity needed to reach the balance would be too severe or too time consuming that the political risk would be great.   (3) the hard left leader, Tsipras, wants to cancel the entire program immediately, reverse the reforms, and possibly default on the remaining foreign debt.  He is betting that the EU would not exile Greece from the EU.  If Greece cancels the program the EU would stop all loans to Greece, leading to defaults on all foreign debt but the need for an even bigger austerity program.  It appears to be a game of chicken and calculated risks as to whether Greece will be exiled and what the consequences would be to the EZ.  (4)  lastly Greece could just leave the EZ, return to it’s currency and since it’s a country with a very small export sector, the risks are said to be small.   The risk in that are the many unknowns in that a Greek departure could lead to more chaos and a further unwinding of the EU, credit downgrades and massive defaults by other countries. 

The consensus opinion is that Greece will eventually default and the question is whether it’s orderly with the blessing of the “troika” via a renegotiated & orderly exit, or a messy divorce.  If they stay in the same failed policies of austerity and structural reforms, they will not be able to restore growth or competitiveness.   Without growth, Greek debt will remain unsustainable. But to restore competitiveness, a large real currency depreciation would have to take place.   That would require (1) a sharp weakening of the Euro  (2) rapid reduction in unit labor costs to allow productivity to outpace wages  (3) rapid deflation in prices & wages or “internal devaluation”  (4) since the first 3 are next to impossible or implausible, the only path for Greece is an EZ exit.

Once again it all ends up at the same place…. No options are pretty, and must be coordinated & financed by the “troika” (the ECB, EU and IMF).   Volumes more can be said about this situation but it’s clear that Greece is in a bad place and over the near term will have to come to a decision that starts the country on a road to recovery and growth.  That will mean an exit from the EZ.  This will be a painful process and cause significant damage to Greece.   The alternative of a continuing downward spiral into depression, that has social, political and economic consequences, would be much worse.  

Needless to say the last chapter has not been written about the ongoing problems in Europe…..  I would bet there will be another next week!!

Returning to the US….  A further look at the “fiscal cliff” that was featured in the first update in May.   The cliff will arrive only 7 weeks after the election and includes:  (1) the end of the Bush Tax cuts  (2) expiration of the 2% point payroll tax holiday  (3) the end of the emergency unemployment compensation (4) automatic budget cuts written into the Budget Control Act—a consequence of the failure of the Super committee's inability to reach agreement on the cuts to spending.  If all were to take place at the same time it would certainly lead to recession since fiscal policy would tighten by over $500 billion at the start of 2013.   It’s enormous and almost 4% of GDP!   Any bets as to whether the Congress has the stomach to allow this to take place?

I believe this is about as likely to happen as Congress getting a spine.  Clearly the odds are that we will wind up with divided government in January 2013 and that will mean the can will be kicked down the road as most of the programs will be extended in an effort to stabilize the economy.  Of course the obvious question is whether more spending will ever result in a stable economy.  We know more debt does not resolve anything….  Look at Greece!! 

On the other hand, even if the expiring measures are extended, there will be some drag on growth due to a decline in stimulus spending, and a winding down of operations in Iraq & Afghanistan that will result in a substantial decrease in military spending.  The winding down of military operations could result in a decline in GDP of roughly 1/2% in both 2013 and 2014.   This could result in further erosions in the California and New England economies. 

Once again, rather than belabor the “cliff” issue, the bottom line is that only a fraction of the policies will be reversed since the impact would be enormous and thrust the US into another recession.  Neither party will allow that to take place.   More than that, there will be drag on GDP from the reduction in stimulus and reduction in defense spending which is all that the fragile economy can withstand.   Depending on the results of the election, and how much more we mimic the failed European model, the air of uncertainty will persist, & will continue to put a choke hold on the growth of the economy.  

Markets are short term quite oversold and due for a bounce that will indicate the confidence the public has in what is taking place.  I expect the rally to fail although it should be strong enough to allow the selling of the weakest positions.   Our cash positions are quite large and blunting the impact of the current decline…..     The summer is about to begin and is generally a slow period.   But as the saying goes, “never sell a dull market short”!!

Please don’t hesitate to email or call if you have questions or concerns!