Markets in a Nutshell
January 25, 2010 Issue
Stocks experienced the long expected pullback last week (remember that we gained 63% on the Dow and 70% on the S&P 500 from March 2009-early January 2010, a huge rally). The Dow dropped 4.1%, the S&P 500 3.9% and the Nasdaq 3.6% pushing year to date returns negative (Dow down 2.4%, S&P 500 2.1% and the Nasdaq 2.8%). Bonds were flat last week and remain positive for the year with the Barclays Aggregate index up 1.9% for the year. Expect 2010 to be a volatile year (sharp ups and downs) as the rebound rally of 2009 (from the stock crash of late 2008-early 2009) gives way to the "show me proof of a strong economic recovery" of 2010.
Last week we wrote of (complained of) the record bonuses being paid out to executives of the big banks here in the U.S. (the ones we, as taxpayers, bailed out). We warned that reckless behavior by the banks would just bring more government regulation and intervention. So sure enough, last week, Mr. Obama comes out and "Rips Banks, Proposes Ban On Proprietary Trading" (headline from the 1/22 Investors Business Daily). Obama proposed downsizing the big banks by separating their risky activities (investment banking, trading activity, etc) from the more conservative taking deposits and making loans part of the bank. This would in effect put back a provision that was in effect from the 1930's until 1999 (when the provision, called the Glass Steagall Act was repealed and allowed the conservative type banks to start engaging in more risky activity). What's all this mean? Read on..
While we are not big proponents of more govt. regulation, the banks cannot have it both ways (as they have since 1999) where they reap the rewards (money) of high risk activities but then when some of those activities fail (like the housing market and mortgage crash), get bailed out by the taxpayer (It is like if you as an investor knew you could take the highest risk in your investment selections and if if pays off you get to keep the gains and if it doesn't pay off you wouldn't have to experience the losses. Pretty nice huh?) And also very destructive as it leads to bad risk taking (and since somebody has to pay for the losses it also leads to slower economic growth). So our take is don't change the current regulation but make the banks "eat their own cooking" in their risks turn out sour. That probably will not happen as it could lead to losses for everyday bank depositors. So regulation is likely to happen.
Author and long time investment advisor Gary Shilling recently put out his list of "buys and sells" for 2010. Here are the some of the areas he thinks are places to be invested in 2010: 1. Treasury Bonds (yep, he thinks rates are going lower) 2. the U.S. dollar 3. Consumer Staples (companies like Kraft Foods, Proctor & Gamble) 3. Income producing securities like high quality bonds, muni (tax-free) bonds and dividend paying high quality stocks. Area he suggests avoiding bank stocks, consumer discretionary (autos, media, retail) and housing related stocks.
Here is something that points to a brighter future for the world economies (once we get through the current "realignment"). Investors Business Daily (1/20/10) reports that the recent elections in Chile are promoting further gains in private enterprise. The new president of Chile is being called the "entrepreneurial president" as he proposes further free-ing of the economic marketplace (Chile has been on a move in this direction since 1990 and has seen its poverty rate go from 45% to 15% and its per capita income go from $1,400 to $15,000). As more countries in the world (the developing world) go this direction over time, it will mean greater prosperity for all.