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Commentary and market review for August follows. 

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tom
Crow Financial

AUGUST MARKET COMMENTARY

By Tom Crow
September 7, 2011

 

 

Gain (Loss) by Period

Index

Month End

Month

Most Recent Quarter

Year-to-Date

Trailing Twelve Months

Dow Industrials

11,614

(4.4%)

(7.6%)

0.3%

16.0%

S&P 500

1,219

(5.7%)

(9.4%)

(3.1%

16.2%

Nasdaq

2,579

(6.4%)

(9.0%)

(2.8%)

22.0%


After being down as much as 13%, the S&P 500 rallied back to finish the month down a little less than 6%. That still didn't keep August from being the worst month the market has seen since May of 2010. It also marked the fourth down month in a row for the index. That hasn't happened since late 2007-early 2008 (Nov-Mar) when the S&P had five down months in a row.

 

Volume was high in August, which is usually a good thing, except when coupled with a volatility index that almost doubled from a monthly average of 19.2 in July to 35. Correlation, the measure of how much stocks move with each other, is down from an almost astounding level of 98 earlier this month, but seems to be rising again. Volatility, at a current reading of around 32 is falling but still has a long way to go to get back to more-comfortable levels below 20.

 

Consumer confidence plunged in August to the lowest level since April of 2009. Expectations and views on future business conditions, jobs and income drove the index to a level of 44.5, down from a downwardly revised reading of 59.2 in July. Economists expected 51.9. When the economy is strong and growing, this number is often above 90.

 

The White House went out on a limb September 1st and forecast an unemployment rate of 8.8% this year. This is the same rate they said would not be exceeded if congress passed the economic stimulus packages they wanted two years ago. They made that call just before unemployment topped 10%.

 

Friday's jobs report was the weakest since last September. The Department of Labor reported no net jobs created in August...zip...zero...nada. Economists were expecting 53,000. The unemployment rate held steady at 9.1%. June and July jobs were revised lower by 58,000. The biggest contributor was 45,000 striking Verizon workers who all filed for unemployment benefits.

 

So...just so I'm sure I have this straight...the Verizon workers have jobs, but they refuse to work, and while they're refusing to work, they are eligible for unemployment benefits? No wonder the country's broke.

 

The president will address a joint session of congress and unveil his long-awaited jobs plan on Thursday night. The way I see it he has three choices.

 

1)     He can trot out the same, warmed-over "we need more government spending, more stimulus, more investment in infrastructure, further extensions on unemployment benefits, and...ah...tax the rich...and...ah...more green jobs" stuff. This is what I expect he'll do, and in my opinion it's the worst option.

 

2)     He can go hard left. Propose massive amounts of social spending and huge corporate and individual tax increases. Knowing the republicans will never vote for this, it's guaranteed not to pass the House and he can blame them and say if they'd only cooperate, we'd be out of this mess by now. He's less likely to do this than option 1, but it's still a remote possibility.

 

3)     He could guarantee his re-election by doing everything the republicans and the tea party want. Cut taxes, cut government spending, reign in out-of-control regulatory agencies, end deficit spending, balance the budget and launch a real debt reduction plan. Think about it. If it works, the economy explodes, he's the hero and he's re-elected. If it doesn't work, he's effectively cut the legs out from under every republican challenger because he's proven what they're selling won't work and he's still re-elected.

 

How will the markets respond to any of the above? Option 1 will be viewed as further confirmation that we really can expect no leadership or serious solutions to fixing this economic crisis from Washington. Fears of another recession will increase. The markets will sell off and gold will punch out to new, record highs.

 

Markets would most likely respond favorably to Option 2...at least for a while. Investors like the sound of more bailouts and stimulus spending (free money for companies) and stocks will likely climb. Since the Fed has already promised to keep rates low, expectations of inflation will also heat and gold will continue to climb as increasingly worthless dollars flood the world economy. The almost-assured inflation that follows means this scenario doesn't end well as US citizens continue to lose purchasing power and our trade partners no longer want to be paid in dollars. Further, facing higher taxes and compliance costs, corporations pull back spending and start laying off folks in order to maintain profit margins.

 

Option 3 would likely be the market's favorite. Whether or not it works in the long-run, the immediate result would be higher stock prices as expectations of a turnaround would send the cash currently on the sidelines into stocks in a hurry. Gold and bonds would sell off. Falling bond prices drives yields higher, making our debt more-attractive to foreign investors. Tax revenues would increase as the economy picked up and companies might even start hiring again. Higher bond yields would put some pressure on the fed to raise rates, but as long as they remained relatively low, they would not be an impediment to growth.

 

You've probably heard reports about all the cash companies are holding. I just ran across a report that said that S&P 500 member companies were increasing dividends at the fastest pace in the last seven years. Given the low prices stocks have been driven to, that sets up some amazing yield plays from stocks that normally deliver fairly low yields.

 

Ooops...the heavily-subsidized solar-panel manufacturer the president used as example when he talked about how the stimulus was helping to create green energy jobs just announced they're laying off 1,100 workers and filing for bankruptcy.

 

Another ooops...Warren Buffet was quoted last month saying the mega-rich should be paying more taxes. Turns out his company, Berkshire Hathaway, with $327 billion in assets has been fighting with the IRS over taxes going back as far as 2002 now estimated to total about $1 billion. And this follows a 14-year-long battle with the IRS over the "dividends received" deduction that was resolved in the company's favor in 2005. Maybe Buffett's accountants didn't get the memo that the boss thinks they should be paying more taxes.

 

We'll do this again in about a month. In the meantime, please call or e-mail if you have questions.