Now What

The $800 billion Clinton-Bush-Obama Tax Plan is in the books. The $600 billion Fed bond purchase program is underway and the stock market is moving higher as a result.

United States GDP estimates for 2011 are inching up with some very notable experts, including Alan Greenspan, suggesting we could possibly see 3.5% growth in 2011.

The U.S. economy is picking up speed and may grow by 3 percent to 3.5 percent next year - Alan Greenspan (http://bit.ly/hwsl3M) 

Instead of another year expanding at no more than the U.S. economy’s potential growth rate—with job gains of 1.2 million and unemployment hovering near 10%—real GDP growth will accelerate to 4%, job gains will pick up to 2.8 million, and the unemployment rate will decline to around 8.5% by year’s end.- Mark Zandi (http://bit.ly/hRT7RN)

Pacific Investment Management Co., manager of the world's largest bond fund, raised its growth forecast for the U.S. economy to between 3% and 3.5% for 2011 from an earlier estimate of 2% to 2.5% - Mohamed El-Erian (http://aol.it/g7sx8u)

The economy will expand about 3 percent next year,- Bob Doll (http://bit.ly/e5rxkU)

In addition, optimism among U.S. chief executives in the fourth quarter rose to the highest level since the start of 2006. Business leaders projected increased sales, investment and hiring according to a Business Roundtable survey. (http://bit.ly/f78rkG)

Experts: Guessing Early and Guessing Often

Next up will be an assortment of investment experts giving us their very precise and inaccurate predictions for 2011.  One thing I have grown to despise but appreciate is the general public desire for precise predictions.  Unfortunately, the more precise a prediction is, the more inaccurate it becomes.  Forecasts will be calling for upgraded GDP growth in the 3% range for all of 2011 and some of this "parlor trick" prognostication may move the markets. Further, I expect most experts will be calling for the S&P 500 to advance 11%-17%.

I like all of this. It sounds wonderful. But I’m not sold just yet. I know how unpredictable these prognostications can be when we still have 9.8% unemployment, 9 million underemployed, and housing starts and housing prices at record lows.

So I'm going to continue to watch and see if people return to work, consumption patterns broaden across all Americans, wages increase, savings rates drop, revolving credit expands and business start making more investments.  Essentially, see that everyone other than the US Government is demonstrating confidence and betting on growth.

With all of that said, we should also be investing because if investors miss just a few critical days of stock market gains they lose out on critical returns. Burton Malkiel summarizes this nicely in his Wall Street Journal article, 'Buy and Hold' Is Still a Winner:

Buy and hold investors in the U.S. stock market made an average annual return of 8% during the 15 years from 1995 through 2009. But if they had missed the 30 best days in the market over that period, their return would have been negative.

So What Now?

If 2011 is indeed another expansion year you should be doing the following:

• Re-examine your asset allocation to ensure you are properly allocated across the right asset classes, sectors and segments.
• Evaluate the risks you took out of your portfolios and make intelligent choices about the risks you want to add back into your portfolios to capture appropriate opportunities.
• Aggregate all the various accounts you might hold and look at your allocation from a macro perspective.  I'll bet you will find some interesting flaws and misconceptions once you look at everything in totality.
• Make a commitment to review your current assets and determine your future liabilities and claims on those assets to ensure your managing those assets properly. More succinctly, budget your risks based upon realistic growth requirements.

While many aspects of next year are uncertain, I do know that we are going to be stronger partners with all of those that turn to us for advice and counsel. That's what’s next.

On behalf of everyone here at Phillips and Company we wish you a very peaceful holiday season, and a happy, healthy and prosperous New Year.

The CBO: Congressional Budget Office Clinton, Bush, and Obama Stimulus Program

Politics Makes Strange Bedfellows Indeed

Weekly Market Commentary 12-13-10

At the end of the week just as everyone was heading out to enjoy the weekend, I took a quick glimpse at the future, or should I say the past.  On TV was former President Clinton standing in front of a Presidential banner backdrop in the White House Press Briefing Room.  This must be a replay from the 90’s I reasoned.  Yet he was talking about the current tax cut proposal in front of Congress.  Maybe it was the stress of the week, or perhaps the delayed impact of the couple of glasses of wine I had the night before.  I felt I was in some kind of time machine malfunction; a past Democrat President pitching a past Republican President’s tax plan that will help the future on behalf of the current Democrat President.

In any case, I shook off the shock and awe and began to analyze the implications on politics and the economy.

The economy first and foremost

 
The tax plan calls for somewhere unto $900 billion in spending, tax breaks, give backs and other items.  (http://bit.ly/ht4qQA) (http://nyti.ms/gSkDIK)

Now if we go back to an earlier blog and review the components of our 14 Trillion GDP economy we can make some logical inferences. 

So what does the additional $900 Billion do for GDP? What sectors will be impacted the most?  These seem to be the main questions investors need to answer. 

Most analysts prior to the details of the tax plan estimated GDP growth for 2011 to be around 2.5%. (http://bit.ly/byj8fJ)   It's no surprise we are now seeing quick estimates for 2011 GDP coming in around 3.5% to 4% by Q4 of 2011.

3.5% GDP in the form of good consumption could be enough to get the “Great American Consumption Machine” flowing at a self sustaining pace.  It's simple, and I have said it many times before:

Consumption and Investments = Jobs, Wages, Profits = More Consumption and Investments

3.5% to 4% GDP is enough to create net new jobs including new entrants to the labor force in my estimation.  This is good for everyone.

In fact, the benchmark gauge for American equities (the S&P 500 Index) is predicted to rise 11 percent to 1,379 in 2011, bringing the possible increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. (http://bit.ly/dVIgjU)

The New CBO and Politics

The CBO (Clinton, Bush, Obama) tax plan is stimulating in the short run, if the consumer is willing to consume.  Obama is betting his election on an improvement to GDP before 2012.  He must have concluded he was not going to be re-elected no matter what he did if the economy is not better by 2012.  If he now focuses in on mid and long run deficit reduction, he might hit a home run compared to the rest of the world as they face austerity and we continue to borrow from tomorrow and spend today.

My Investment Themes

So my investment themes continue to be centered on targeted improvements in the economy.  Only now, I am adding a large focus on consumer discretionary (assuming the tax plan actually passes).  While we have had a focus on the high end consumer, I believe the CBO stimulus will reach down to most American consumers.  While I don’t personally support huge deficit programs it’s clear that short run spending might be the best chance we have to keep the US economy from becoming Japan’s economy.

• Luxury Goods with growing emerging market exposure
• Weak dollar opportunities - exporters
• Select technology - specifically business processing
• Media (Print that is adapting to on-line)
• Rare Earths (again see our Tweets on this)
• Emerging Markets Debt and Equity that is driven by US dollars finding better investment environments
• Segmentation of emerging markets rather than broad based emerging markets exposure, specifically Brazil Energy and Telecom
• Mega Cap US companies that are finding great margins with little top line growth, especially exporters
• Healthcare Assisted Living
• Germany
• Financial Asset Managers/Hedge Funds
• High end retail

Tim Phillips, CEO

At the confluence of the mighty Columbia River and the Pacific Ocean is Buoy 10, a great spot for Salmon Fishing and getting sea sick.  The absolute chop, current and waves caused by these two massive bodies of water cause quite a stir.  In fact, it’s often people lose their lives trying to cross this bar or fish in the currents.

This is a little what it’s like navigating the treacherous capital markets these days.   While it’s true the best opportunities to generate positive returns is to invest in somewhat uncertain times (please take note of the word “somewhat”).  The chop is what you need to make returns but it doesn’t mean you won’t get sick.

That’s what it was like this last week.  On one hand you had Goldman Sachs (the self proclaimed gold standard of investing) calling for 2.7% GDP growth and a 22% return for the S&P 500 in 2011.  In fact, they called for massive opportunity in many asset classes and countries next year.  Of special note Goldman became very bullish of financial stocks for the first time since 2008.  These guys are really feeling the economic love.  Below you can see a few of their predictions (http://read.bi/fzCk9J).

Japan

Current:  875   2011 End:  1000    Change:  +14%

Asian Markets Ex Japan

Current:  449   2011 End:  580    Change:  +29%

 STXE 600

Current:  262    2011 End:  330     Change:  +26%

S&P 500

Current:  1188   2011 End: 1450    Change:  +22%

On the other hand you had a Friday jobs report that fell well short of expectations, adding only 39K jobs for November vs. an expected 100K jobs bumping the unemployment rate from 9.6% to 9.8%. What was particularly disturbing was the zero growth in wages (http://bit.ly/48PjbR).

While there is lots of conflicting data that creates these choppy seas, these two converse data points highlight the fact that we are in the middle of some very choppy seas.  Buoy 10 never felt so good in comparison.

The critical point to keep in mind is the fact that markets trade on expectations for the future.  Goldman’s analysis is clearly an expectation for the future.  While the jobs data is a clear and ugly look at the very recent past.  For Goldman’s analysis to see any hope of implementation we will need to see the end of 2011 and much of 2012 GDP growing in the 3%-plus range.  My personal opinion is that is entirely possible. 

A slight lift in our economy can create a significant lift in our markets as they have built in so much permanent negative information.  Hopefully some smooth sailing ahead.

Unfortunately, we will have to work through some choppy waters as the churn from forward expectations and the reality of backward looking economic ugliness collide.

My Investment Themes:

• Luxury Goods with growing emerging market exposure
• Weak dollar opportunities - exporters
• Select technology - specifically business processing
• Media (Print that is adapting to on-line)
• Rare Earths (again see our Tweets on this)
• Emerging Markets Debt and Equity that is driven by US dollars finding better investment environments
• Segmentation of emerging markets rather than broad based emerging markets exposure
• Mega Cap US companies that are finding great margins with little top line growth, especially exporters
• Healthcare Assisted Living
• Germany
• Brazil Energy
• Brazil Telecom
• Financial Asset Managers/Hedge Funds
• High end retail

Tim Phillips, CEO