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March stock market and economic review and commentary follows. 

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Tom
Crow Financial

MARCH MARKET COMMENTARY

By Tom Crow
April 8, 2013

 

 

Gain (Loss) by Period

Index

Month End

Month

Most Recent Quarter

Year-to-Date

Trailing Twelve Months

Dow Industrials

14,579

3.7%

11.3%

11.3%

10.3%

S&P 500

1,569

3.6%

10.0%

10.0%

11.4%

Nasdaq

3,268

3.4%

8.2%

8.2%

5.7%

 

The S&P 500 and Dow Industrial indices pushed to all-time highs during the first two days in April, only to be spooked by a long list of things, including: the Cyprus financial crisis, North Korea, the US Sequester and hints of future ugliness in the looming debt ceiling debate, the payroll tax increase, and a terrible March employment report.

 

A moderate pullback or correction of between 5%-10% would not be a big surprise. Despite stubbornly low volume, the volatility index (VIX), which bounced higher in February, has moved even lower than it was in January, indicating investor fear continues to decline.

 

Before I dig into the March report, I mentioned we might look for big revisions to earlier reports and boy, did we get them. The number of jobs created in January was revised from 119,000 to 148,000; and in February, also revised from 236,000 to 268,000. These revisions, combined with a weak first look at March employment reinforce the importance of looking to the trend created by the longer-term moving average, rather than making a decision on the health of the economy based on volatile, monthly data.

 

The Department of Labor reported the economy created only 88,000 jobs in March, the fewest in nine months; sparking fears that the US may be headed for the third weak spring hiring season in a row. The unemployment rate dropped from 7.7% to 7.6%, but again, only because nearly a half-million more people quit looking for work or exhausted their benefits last month. The percentage of Americans working or looking for work is the lowest it has been in 34 years.

 

Quite predictably, politicians on both sides jumped in front of microphones to blame their opponents for the weakness. The political theatre is tiring. One thing I will argue is that sequestration had anything to do with this weak jobs number. All threatened and project layoffs have a minimum 30-day notice periods, and most are longer than that, so the earliest sequestration-related job losses will hit the employment numbers is May or June. The only notable government layoffs reported were from the Postal Service and were not related to the sequester.

 

First-quarter earnings start this week, but corporate earnings only tell part of the story. Companies can do other things to attract investors and drive their stock prices higher like buy back stock or offer special dividends. Again, the markets look like they're overbought and overdue for a mild correction, but there is room for stocks to go higher before valuations get ridiculous. Also, the market's ability to shrug off bad news and move higher, or close well off the lows on bad days tells us there are still buyers willing to jump in when prices are down.

 

The following is an excerpt from an article I found last month that nicely buttons up my thoughts on the dollar and the global economy. It is from the S&A (Stansberry & Associates) Digest dated March 8, 2013.

 

For the first time in human history, the entire global economy relies on a paper currency - the U.S. dollar - which is not linked or backed up by any reserve commodity (such as gold). Roughly 60% of the world's bank reserves are in U.S. dollars. Its standing as the world's reserve currency permits America's leaders to do what no other country in the world can do: legally print money to repay debts. As long as this system remains in place, there is no limit - none whatsoever - to America's credit.

 

When this system was created following World War II, America's reputation was such that no one believed that we would ever become a net debtor to the world. At the time, we were the world's largest creditor (by far). It was greatly in our best interest to maintain a firm and stable value of the dollar, so that our loans would be repaid in sound money.


However... the power to rack up unlimited debts quickly corrupted our political system. In less than 50 years, we went from being the world's largest creditor to being the world's largest debtor in history. With access to unlimited credit, our Federal government - whose total budget during peacetime had historically been well below 5% of GDP - grew like the magic beanstalk to nearly 25% of GDP.


As a result, the U.S. dollar - which remains the foundation of the world's financial system - is little more than an "I.O.U. nothing." The U.S. Treasury has no realistic ability to ever repay the holders of its notes in sound money, not with total current debts that exceed the United States' GDP. And that's not including our government's unfunded liabilities, which exceed the value of every liquid asset of every country in the world. (Re-read this entire paragraph, slowly.)


So... what will happen next? As long as we retain our status as the world's reserve currency, we will continue to have every incentive to go further and further into debt and to finance these massive obligations with our unique printing press. We will continue to exploit this system until it collapses. Remember, the dollar is purely a paper (or a digital) abstraction. It is not tied to any firm or fixed value. There's literally nothing to prevent us from continuing to borrow trillions every year.


This unbelievable power seems like a miracle to our leaders, who undoubtedly believe that by cutting more slices into the pie, they're creating a bigger pizza. I suppose they haven't fully considered the downside to such a system, however. If confidence in the dollar were to fail, what on earth could be used to stop the panic? There are no reserves. There is only more paper.

 

Last week, Japan moved to double its money supply. This has been described as the largest quantitative easing move since Weimar. As expected, the Yen weakened against the dollar, and their market rallied significantly in response to the move, but is there any real gain or growth in such methods?

 

Japan's economy flat lined a decade before the U.S.'s and they've been trying to ease and stimulate their way out of their slump for more years than we have, to little avail. Will it work this time? We can only wait and see, and think about the implications here at home. The Yen is not a reserve currency, but a lot of what they're doing applies here as well.

 

Are our markets moving higher and higher because the value of companies and commodities is increasing, or because the currency by which their value is assigned is worth less and less? Do the new highs in the market and in investors' portfolios really represent any real increase in wealth? How are the estimated trillions of dollars sitting "on the sidelines" in banks deteriorating our national net worth?

 

As the dollar loses value, it causes the nominal price of stocks and the nominal amount of earnings to go up. In short, a weaker dollar is indeed a path to a higher stock market, but it's not the path to prosperity or wealth. It's just a sign of more dollars in the system. As an investor, what you must know is that holding cash or earning less than the rate of inflation on it is a losing game, and buying low and selling high is a tough and sometimes risky way just to break even, but it beats losing.

 

The president and his advisors say we can't get out of this by cutting government spending. They want higher taxes and more spending. The fiscal conservatives say we can't spend our way to prosperity when the dollars we're spending are borrowed and not backed by anything.

 

How does it end? Not well I fear, but it is interesting to watch, and it sure keeps us busy. Please call or email if you have questions. Have a happy Tax Day!