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The Headline May Be Goldman Sachs

Richard E. Haskell, Sr.


Inside Signature Update


• The Market – Trouble at Goldman More About Headlines Than News

• The Economy – 1st Quarter 2010 Earnings Reports

• The Takeaway – Become Focused on Quality and Healthy Balance Sheets


THE MARKET – Trouble at Goldman More About Headlines Than News

News of the Securities Exchange Commission’s (SEC) filings against Goldman Sachs (GS) dominated the financial news in mid-April 2010, but the real news was the surge in strong earnings reports from some of the nation’s most important corporations. Nonetheless, Goldman’s issues are substantial, and the impact on the firm many see as Wall Street’s premier investment banker may take years to sort out; not to mention the negative consequences the firm’s actions may have had on investors and the market. The firm’s association with John Paulson (Paulson and Co.) and Fabrice Tourre and the allowance of questionable trading and disclosure practices is troublesome.

The potential fallout for the financial services sector, stemming from the SEC’s charges against Goldman, is massive. Allegations and charges of abusive practices and fraud in Goldman’s hedge fund and CDO (collateralized debt obligation) operations will undoubtedly shake up much of Wall Street’s hierarchy, undermine investor confidence and rejuvenate legislative efforts to reign in the nation’s investment banking complex. But maybe that’s exactly what legislators and regulators had in mind when the SEC’s charges were announced.

There is growing concern that SEC leadership, the White House and Congressional Democrats may have timed the filing of charges with renewed legislative efforts focused on increasing federal investment banking regulation with the release of quarterly earnings from some of Wall Streets most important firms. Without attempting to discount the potential severity of Goldman’s alleged actions, Representative Darrell Issa (R-CA) called on SEC Chair Mary Schapiro to provide documentation of "any sort of prearrangement, coordination, direction from, or advance notice" between the SEC and the Obama administration or congressional Democrats. Within minutes of the SEC’s filing of charges, the internet and media were awash with reports and “spin”; including Democratic National Committee (DNC) fundraising ads aimed at making the most of the controversy.

Financial services industry regulatory reform efforts, led by Senate Banking Committee Chairman Chris Dodd (D-Conn) and Representative Barney Frank (D- Mass), began to make the national news again in a well orchestrated campaign aimed at legislators and voters, the timing of which was simply too coincidental with the SEC’s announcements to be mere happenstance. While it may not matter in the long run, it does suggest that the SEC, under Mary Schapiro’s leadership, may not be as independent as is intended.

For long-term market observers, this has an all-too-familiar ring to it and is beginning to feel similar to the scrutiny the SEC focused towards Drexel Burnham Lambert in the late 1980’s. Some will recall that Drexel, the Goldman Sachs of the 1980’s, was a leader in the underwriting of debt instruments known as “junk bonds”. These bonds were packaged and sold in an effort to provide less credit worthy firms with debt financing in such a way that it was difficult for many investors to comprehend their true origins, but they carried the promise of returns that made them extremely attractive to the markets. In affect, “junk bonds” were to the 1980’s what derivatives, CDO’s and CDS’s became to the 2000’s.

Wall Street’s “junk bond king”, Michael Milken, engineered Drexel’s underwriting and trading of these instruments and generated extraordinary profits for the firm. In 1988, the SEC brought separate charges against Milken and Drexel, culminating in a 10-year prison sentence for Milken and Drexel’s demise. As an interesting aside, it’s unlikely Milken would have faced prosecution in today’s environment where the risks, rewards and structures of the capital markets are more widely understood; Milken resurfaced in the late 1990’s to become one of Wall Street’s wealthiest and most philanthropic personalities.

The losses resulting from the Drexel/Milken scandal amounted to tens of billions of dollars and rattled the financial services industry, but brought about little change in the structure and marketing of complex debt instruments. In truth, the debt markets opening up in the 1980’s led to the more complex derivatives market under scrutiny today.

While the regulation of the derivatives market and its complicated instruments are necessary, the demonization of the industry and some of its important firms and leaders, is not. The Obama administration and Democratic leadership continue to lecture Wall Street and risk undermining the nation’s economic recovery. What appears to have been forgotten is that it takes investment capital to create jobs; which capital comes through personal savings, corporate profits and the capital creation efforts of the nation’s investment banking firms, of which Goldman Sachs is an important leader.

By November 2010 the political import of the investment capital/jobs creation relationship may become acute for members of the House of Representatives and incumbent Senators seeking re-election. Many Americans will cast their votes for political hopefuls they view as able to see past the rhetoric. As former US President Bill Clinton asserted, “it’s the economy, stupid.”

It’s time for our nation’s elected officials, governmental agencies, and media representatives to recognize that headlines and well timed campaigns focused on anything other than capital and job creation only serve to expose their biases. In the end, Americans spend and vote; the less they’re able to do of the former makes them that much more interested in exercising their right to affect change with the latter.


THE ECONOMY – 1st Quarter 2010 Earnings Reports

As the US markets continued to move past 11,000 points on the DOW in April 2010, investors and policy makers should focus their attention on earnings reports and away from distracting sideshows. Many expect that the gains of the last 12-13 months (almost 70% for the DOW) aren’t likely to be repeated any time soon and that the easier part of the recovery may be behind the markets. Moving forward, market gains are likely to face periodic headwinds and will continue to rely on growth in revenues and earnings.

With unemployment still in excess of 9%, the nation’s attention must continue to focus on earnings and investment. Economists will point out that only businesses create jobs and they only do so towards the latter part of a recovery, after there has been sufficient growth in revenues and profits to justify investing in growth to support the increasing demands of the market place.

As further proof of the strength of the current economic recovery, many of the nation’s most important firms have announced impressive revenue and earnings growth for the 1st Quarter 2010 compared to the same period in 2009. The following are a small sampling of those reported most recently:

• Apple posted profits of $3.07 billion compared with $1.62 billion.
• Illinois Tool Works posted $294 million in net profits versus $8.1 million.
• Citigroup’s earnings climbed to $4.4 billion from $1.59 billion.
• Yahoo’s profits increased to $310 million from $118 million.
• United HealthCare’s earnings rose to $1.19 billion from $984 million.
• Goldman Sachs posted a 91% increase to $3.46 billion from $1.81 billion.
• Union Pacific’s earnings jumped 43% to $516 million from $362 million.
  
  In the midst of the 1st Quarter 2010 earnings reporting season, the S&P 500 crossed the important 1,200 mark and the DOW fortified its position north of 11,000. These levels will only be supported by continued earnings growth as briefly discussed in the April 6, 2010 issue of Signature Update (Earnings Expectations and Tobin’s Q).
  
  Other earnings reports of interest are Harley Davidson and Coach; important brands when considering consumer preferences and higher-end consumption patterns. Though neither firm reported record earnings, both beat analyst expectations and reported both earnings and revenue improvements over prior periods.
  
  Though there will certainly be earnings disappointments as well, the trend towards higher revenues and earnings offers important evidence that the economy is headed in the right direction. Economist and former Assistant Secretary of Commerce, Dr. Quincy Krosby, points out that the markets may experience a “tug of war” in coming months as sovereign debt issues and likely interest rate increases become important factors. But even Krosby warns against betting on US small business and consumers, suggesting that businesses and consumer will always find a way to prosper.
  
  Among the “head winds” that may lie ahead are near-certain tax increases for consumers and increased borrowing costs for businesses. As unwelcome as these may be, it’s possible that they’ll come in moderation. If President Obama keeps his campaign commitment to lower corporate business tax rates, the aggregate impact on the economy could be negligible; sadly campaign promises are much like devalued currency – they’re hard to spend and most often buy very little.
  
  Though investors may have already gathered the easier gains from the recovery, the US markets are likely to trend higher on improving revenues and earnings. Once businesses have recovered sufficiently to round out inventories and replace outdated equipment, the employment market can expect to experience a sufficient rebound to move the economy into a post-recession/post-recovery period of sustainable growth and market gains.
  
  
  
  THE TAKEAWAY – Become Focused on Quality and Healthy Balance Sheets

• Financial stocks may have seen their near term highs as legislative and regulatory efforts are likely to increase costs and reduce revenues. Additionally, the federal government’s sale of Citigroup shares in the open markets may put downward pressure on banking stocks as a whole.

• Though most healthcare and pharmaceutical firms posted increased revenues and profits for the 1st Quarter 2010, many lowered their guidance for future quarters on concerns over potentially negative consequences of the recently passed healthcare legislation.

• Investors should become increasingly focused on quality issues and healthy balance sheets to avoid possible market headwinds. Dividend paying firms with limited debt may become increasingly attractive as the recovery begins to mature.

• Voters across the country are presenting an anti-encumbant attitude that should be concerning to elected officials of both parties. Jobs are more likely to win voter loyalty than party affiliation in the November elections.
  
  
  
  
  Signature Update is offered by Richard Haskell, CEO of Signature Management, LLC

Looking for Conviction in the Markets

Richard E. Haskell, Sr.


April 16, 2010 Edition, Volume IV

Inside Signature Update

• The Market – Looking for Conviction in the Markets

• The Economy – Bank Size is Not the Danger Some Believe

• The Takeaway – Higher Interest Rates Can Hurt and Help


THE MARKET – Looking for Conviction in the Markets

With the DOW squarely over the 11,000 point level, investors are looking for clear signs the index is headed higher. Recent economic reports representing increasing factory orders and retail sales suggest 1st and 2nd quarter GDP gains may be better than expected, but the labor market continues to offer concerns. Federal Reserve Chairman Ben Bernanke has stepped-up the tone of his comments regarding growth expectations, now calling for “moderate growth” rather than “slow growth” for the remainder of the year. These and other factors have helped move the major markets indexes by some 5% year-to-date, but there continues to be a significant amount of investor capital resting outside of the markets and concerns that lower market volumes may suggest a lack of investor confidence have some wondering if the current market levels may soon suffer from a lack of conviction.

Many investors have become curious at what some consider low volume levels. On an absolute basis, 2010 volume is averaging about 4.7 billion shares/day. This is down 15% vs. the 2009 average NYSE volume of 5.5 billion shares/day. Yet 2010’s average volume is only slightly less than the 2008 average of 4.96 billion shares/day. While some consider lower volume a problem, others recognize it as a sign the markets, and economy, have simply reached more sustainable levels of strength and stability.

Many forget that the NYSE single-day volume crossed 200 million shares for the first time in early 1984 and it wasn’t until the year 2000, some sixteen years later, that the daily volume reached one billion shares. Even though 2010 volume levels appear low when compared to those of 2008 and 2009, they’re more than four times higher than those of only a decade ago; at the height of the dot com craze.

On Monday, April 12th, 2010 the DOW crossed over the 11,000 point mark and invigorated investor hopes for meaningful market gains in 2010. Volume levels, as the index approached and then exceeded 11,000, were lower than average for the year and suggest to some that the gains may not be backed by sufficient conviction to remain at current levels. The DOW, though having experienced a sharp correction in late January/early February, has already seen 2010 gains of 5% and investors are looking for more. According to a recent investor survey released by CitiGroup (C), 62% of investors expect the markets to continue to improve over the next six months. With the VIX (volatility index) at its lowest point since the 3rd quarter 2007, it appears that few are expecting significant moves in the near term; rather, a continuation of the current positive trend looks likely to continue through the remainder of the year. Lower-than-average volume isn’t the problem some suppose and as investors continue to come in from the sidelines with their cash, both market levels and volumes will rise.



THE ECONOMY – Bank Size is Not the Danger Some Believe

The “Too Big to Fail” issue continues to be at the center of financial industry regulatory reform and rightfully so; neither the American people nor the economy are prepared to endure another capital markets crisis like that experienced in 2008 and 2009. At the heart of the issue is whether Congress should seek to limit the size and impact of major consumer and investment banks or should measures be adopted that allow for greater strength and stability at banks of any size and type.

The battle lines aren’t as clearly separated by party lines as many might suppose. Certainly, free-market conservatives want to see as little legislative intervention as possible, while those more interested in central planning remain committed to long-term nationalization of the banking industry. Fortunately, neither of these groups are likely to prevail. This is truly one of those issues where a more moderate, centrist compromise will likely best serve the nation’s economy and citizens.

There remains a fallacy in the “Too Big to Fail” concept. It’s not only the size of an institution that may offer risk to the economy if it is allowed to fail, but how interconnected the bank’s products are with other banks, in both the global and domestic markets. All one has to do is recall that Lehman Brothers accurately wasn’t considered “Too Big to Fail”, but it was so interconnected with investment and consumer banks the world over for its failure to send the global markets into a tail spin. Without significantly curtailing the capital market activity of our banks there is virtually no way to avoid this inter-connective exposure. Placing the sort of regulatory constraints on US capital market makers that might possibly minimize the impact would cripple the economy. There are other solutions, of course.

The problem we experienced wasn’t one of size, it had to do with strength and stability. The current legislative proposals requiring greater reserve requirements and capitalization ratios for those banks involved in the capital markets hold credible solutions to the problem. Not only would placing such requirements on our nation’s banks create sufficient strength to lessen the possibility of future crises, but it would also make it less likely for banks to become large enough to be of concern. Those legislators seeking graduated reserve and capital ratios on banks are, in effect, able to limit the size of the bank without placing specific limits on a bank’s size.

Additionally, legislation has been proposed that would require the formation of a “super” FDIC of sorts – an insurance pool funded through transaction fees that would be available to “bail out” troubled investment banks rather than needing to seek tax payer assistance. While there are pros and cons to this concept, it could be a sensible complement to increased capital and reserve requirements. It would take a substantial length of time before such a fund were to become of sufficient size to be impactful, but once established it may offer numerous benefits to the banking system and the economy. It could also become a tempting resource for legislators and would need to have every possible safeguard associated with it’s independence to protect it from those looking for fiscal advantages.

Important to remember, however, is that any additional pressure put on the US banking system may have troubling near-term consequences. The imposition of increased requirements, transaction costs or size limitations would reduce any bank’s ability to lend, and lending remains a critical element in the recovery of the US and global economies. With real interest rates near 0%, it is difficult for banks to lend to any but their best customers, and in this case those happen to be major corporations through which the economy has seen stagnant net job growth for decades. Small and medium size businesses create virtually all of this country’s new jobs, and in the aftermath of the recent recession they’re simply not able to attract sufficient lender attention to gather the credit needed to take advantage of important growth opportunities. In order for the US labor market to see meaningful improvement, small businesses will need to have access to credit capital and be free to fund job intensive growth.

What is left is a classic conundrum: the national and global economy need to be free from the potential damaging affect of an under resourced banking system and the national and global economy need the lending resources of a banking system with limited constraints. Fortunately, the type of compromise that it may take for Congress to bring current legislative proposals towards becoming law will take time; hopefully enough time to allow reason and sensibility to gain the upper-hand over party politics and extreme action.


THE TAKEAWAY – Higher Interest Rates Can Hurt and Help

• Even at volume levels below 2008 and 2009 peaks, there is sufficient strength in the markets to continue to experience gains through the remainder of 2010.

• Jobs reports are likely to appear inconsistent until there is a clear path for small businesses to have the credit capital needed to create jobs and fund growth opportunities. Higher interest rates will come after economic recovery is maturing and will provide incentives for banks to lend. As long as rates remain reasonable (below 2 ½% to 3% Fed Funds rate), job growth will speed up.

• China’s continued growth, in excess of 11%, may need to be slowed by government intervention to avoid overheating and damaging the global economy further; it’s a delicate balance for a nation not used to capitalist nuance.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Earnings Expectations and Tobin's Q

Richard E. Haskell, Sr.


April 6, 2010 Edition, Volume IV

Inside Signature Update

• The Market – Earnings Expectations and Tobin’s Q
• The Economy – Is a “Double Dip” off the Table?
• The Takeaway – There’s More to Come


THE MARKET – Earnings Expectations and Tobin’s Q

Market earnings expectations and ratios

As the DOW approaches the 11,000 point mark, market observers begin to wonder just how far the index can climb before the market becomes overvalued. It’s a difficult question to answer and has everything to do with corporate earnings and how investors value the future earnings potential of firms as the economy recovers.

The 11,000 point mark on the DOW is less of a technical benchmark than it is an emotional one; the S&P 500 is another story. The S&P closed Monday, April 5th at 1187, only 13 points shy of the important 1,200 point level. For the S&P to sustain itself beyond the 1,200 point level, the market will need to see increased corporate earnings.

The index’s current P/E ratio (price to earnings ratio) sits at 21.7 – meaning that for every dollar of earnings there is $21.70 of index value. That may seem high, but when compared to forward earnings expectations the ratio drops dramatically.

Market analysts expect to see aggregate, per-share earnings for those stocks comprising the index of $83-$85 for 2010 and $90 for 2011; compared to current earnings of $51.74 for 2009. Based on the current earnings ratio of 21.7, these earnings estimates, if reached, would indicate the S&P at a lofty 1,800 by the end of 2010.

Perhaps a more realistic expectation is based on the index’s mean (average) ratio of 15.73, which would indicate the S&P 500 index at 1,305. This represents an increase of 10% from current levels and falls directly in line with our 2010 estimates for the domestic equities markets.

Earnings Reports and Tobin’s Q

In the coming weeks publically held corporations will begin to release 1st Quarter 2010 earnings reports. Some investors and observers find themselves confused as to why some stocks will post gains in the face of strong earnings, while others might decline: the answer lies within Tobin’s Q.

In 1969, Nobel prize winning economist, Dr. James Tobin (Yale University) challenged the traditional theory that investments were valued as a function of economic interest rates and proposed an alternate valuation model that became known as Tobin’s Q. Tobin’s model suggests that investment values are based on how investors value a firm’s business plan, expected earnings, potential political and economic developments, and the replacement cost of the investment. It presumes that the market has full knowledge of those issues impacting a firm (transparency) and is predicated on a liquid market for the investment (publicly traded stock, etc.).

The issues of supply and demand, business cycles, global markets, etc. weren’t included in valuation models before Tobin published his theory, and most investors were simply left with P/E ratio and dividend yields when attempting to make good investment decisions. Based on Tobin’s theory and the complex mathematical formulas he developed to model it, market values rise and fall based on the aggregate affect of these factors, rather than simply on changing economic interest rates. While most investors won’t apply available data to the model, there’s sufficient recognition in the markets of those factors impacting values that the model is used implicitly to support price levels and predict future valuations.

When a company announces earnings estimates, the value of their shares change in direct relation to how the estimates compared with analyst expectations. Similarly, when earnings are reported, the actual is compared to estimates and expectations and share values may adjust accordingly. If good earnings are already expected, the share price has already risen to meet the expectation, and once actual earnings are reported the share value will only change if actual results differ from those anticipated.

When firms report their earnings, they normally update the firm’s guidance, or expected performance, against their business plan. This can also impact share values as investor and analyst expectations are heavily based on a firm’s guidance; if the firm has a track record of accuracy and reliability. For those firms that have a poor track record when it comes to meeting the expectations their own leadership cultivated, the market will rarely respond to a new set of optimistic expectations, but will react sharply to negative guidance.

Ready availability of information and a liquid market

The key to Tobin’s valuation concepts and to how today’s investors and markets value investments lies in the ready availability of information and a liquid market. Since Tobin formulated his theories these market elements have improved dramatically and market valuations have become more statistically significant than at any time in history. Likewise, expectations for earnings growth, though becoming more optimistic than in recent months, have solid foundations and are based more on observed trends than anticipation and hope.


THE ECONOMY – Is a “Double Dip” off the Table?

Mounting evidence and some optimistic expectations

There’s mounting evidence that the economy will continue to grow at a 3% to 5% pace for 2010; with some expectations reaching as high as 6% based on March 2010 economic activity reports. Factory orders and retail sales continue to make important gains and the labor market is just beginning to see the first signs of meaningful improvement. Inventory levels reflect demand-driven patterns as manufacturing increases and wholesale orders are only barely outpacing consumer demand. There is now enough upward momentum that many economists believe the US is no longer in danger of a “double dip” recession.

Perhaps the most important sign of real growth comes from the Federal Reserve itself. The Fed’s February 18th increase of the discount rate to .75% and other recent comments by Fed policy makers point to the agency’s firming belief that the US economy is approaching the point at which it will be able to sustain a broad-based rate increase.

Market reactions to higher rates

While the immediate stock market response of such an increase will most likely be negative, the longer term reaction will almost certainly be strong and to the upside; as investors accept that the Fed is committed to only raising rates in the presence of economic strength. The current 0%-1/4% Fed Funds target is so low that investors have little incentive to invest in interest bearing or dividend yielding instruments. As the rate environment shifts to more sustainable levels, investors will come back to the markets yet more aggressively than already experienced; first to bonds and then to stocks, as long as targets don’t rise above 3%-4%. As a result, the capital markets, so critical to business lending and capital formation, will open up and funds needed for growth will be widely available for the first time in years.

The bond markets will certainly respond negatively to rising rates, due to the inverse relationship between rates and bond prices. Higher interest rates also drive the dollar higher and as a result, commodities prices for agricultural products, precious metals and oil will rise in response to higher rates. The aggressiveness of rate increases will reflect the Fed’s concern over possible inflation. Moderated increases of ¼ to ½ point per announcement will suggest the Fed is simply trying to react to a stabilizing market; while aggressive increases of ¾ point or more are likely to signal the Fed moving into inflation fighting mode.


Federal Reserve Chairman Bernanke and other Fed Governors have already stated that when rate increases begin they’re likely to be meaningful. Though this may have been in response to inflation concerns, the markets will breathe a sigh of relief when the time comes. This is one of those issues that the market recognizes must be faced in order for the economy to move past the recovery stage and into longer-term growth. Once the announcements are made and the market digests the material impact, the mounting anticipation will likely give way to higher equity values and real post-recession growth.


THE TAKEAWAY – There’s More to Come

• The DOW is poised to cross the 11,000 point mark at any time, and will likely climb higher in coming months. Though interim corrections of 5%-7% will occur, market levels should rise with corporate earnings through the end of the year.

• The much anticipated “Double Dip” for the US economy appears to be highly unlikely based on economic reports and rising expectations. Further weakness in the real estate and employment markets could spell trouble, but most analysts expect the danger has passed.

• The Fed’s interest rate position remains unchanged, but small “adjustments” are being made and setting the stage for economically healthier rates in the future.






Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Think Twice Before Moving to the Sidelines

Richard E. Haskell, Sr.


April 1, 2010 Edition, Volume IV

Inside Signature Update

• The Market – Investors: Think Twice Before Moving to the Sidelines

• The Economy – Spring Economic Potpourri

• The Takeaway – Just What Were They Thinking?


THE MARKET – Investors Should Think Twice Before Moving to the Sidelines

Over the past few weeks we’ve experienced too many trading sessions where the DOW has climbed to double and triple digit gains before settling in with only modest improvement on the day. In some markets, this sort of activity is a sign the market is topping out and a correction is likely to follow. In others, it’s simply a response to other economic activity, news events or political issues. Regardless, it’s something to pay attention to.

A market correction of 5-10% is often the precursor to a rally sufficient to take the market to new heights; such as the correction and ensuing rally we experienced earlier this winter. The DOW closed at over 10,700 in mid January before pulling back to just above 9,900 in early February; the index closed Tuesday (3/30/2010) at over 10,900 and appears to be headed towards 11,000 or higher. In this case, the correction led to a healthy rally that has the markets at near-term highs. Investors pay little attention to corrections and rarely attempt to participate in the type of activity traders employ in an effort to exploit market dynamics. Barring unexpected political events or natural disasters, our expectation is that the DOW will continue to climb through the 11,000 level and close out 2010 well above current levels – perhaps 1,000 points higher than Tuesday’s close.

Most of us are familiar with the adage “Sell in May and go away”; it’s an old stock market saying, suggesting that investors should sell out of their portfolio’s in May, presumably after a Spring rally, and then buy back into the market in the latter part of the Summer or Fall, after an expected decline in market values. More often than not this strategy yields higher returns than investors might have experienced had they simply maintained a particular position in a given stock, but it’s highly dependant on when you sell, when you buy back in and whether or not you have the discipline to follow the markets movements.

In truth, it’s not a strategy most investors should employ unless they’re prepared to monitor the markets closely or have an advisor with whom they’re closely aligned and who utilizes tactical trading models. Such activity certainly has its risks and even savvy investors should carefully weigh them against the possible rewards. Traders, on the other hand, love the concept. Not only does it give them the potential for greater gains, but it lets them focus on other activities for the summer.

The “Sell in May” strategy has its roots in our nation’s agricultural history. From the 17th to mid-20th centuries, those institutions prepared to lend capital to farmers typically did so in time for them to purchase seed before the spring planting season. They would often sell other investments to raise the cash to do so, and in the fall, after the crops were harvested and farmers repaid their short-term loans plus profits and interest, these same institutions would put their resources back into the markets for the winter.

The act of liquidating investments to raise cash would put downward pressure on market values and by the end of May markets often began to show declines. When funds would then be reinvested in the fall, including profits, market values would increase due to the net capital inflows. Even though today’s markets aren’t subject to the same forces they were when the US was principally an agrarian economy, some still rely on the same market cycle to govern their holdings. It’s an out-dated strategy that becomes less statistically meaningful with every passing year.

Most investors aren’t prepared to do this of course, but for those that are the statistics are only sometimes in their favor. There are years, like 2009, when this strategy would have been very costly. In the July 2, 2009 issue of Signature Update we discussed the problem of selling off a portfolio in the face in of a recovering market. The DOW closed at just over 8,600 at the end of May 2009 and opened October 1st at over 9,700 – those employing the “Sell in May” strategy could have left 1,100 points of profit on the table. On the other hand, employing the strategy over the same time frame in 2008 might have saved investors as much as 1,700 points on the DOW. Obviously, 2009 was a recovery year for the markets while 2008 saw painful losses overall.

What about in other market years more similar to 2010? The data offers a mixed bag, with far too many variables to develop a reliable regression model. What is clear is that the forces that helped coin the term, “Sell in May and walk away” were more dominate in decades and centuries past than they are in our current economic era. Our markets and economy are still in recovery mode and will be for several years to come. We continue to assert that even though we’ll experience short-term market corrections, perhaps a few more times this year, the markets have a long way to go before topping out and becoming overvalued. P/E ratios on large caps are comparatively low, earnings remain robust, dividends are increasing, and the Treasury Yield Curve remains steep. This is a time of opportunity and growth and certainly not a time to “walk away” or move to the sidelines.



THE ECONOMY – Spring Economic Potpourri

The Consumer Confidence Board released the March Consumer Confidence Index this morning, reflecting a stark improvement over last month’s figure. The March CCI came in at 52.5, up from 46.4 in February and represented the fourth month out of five that the index reflected consumer’s improving attitudes. Details inside of the numbers tell an important story as well. In February, 45.1% of respondents described the economy as “bad” while only 42.8% offered the same analysis in March.

The March survey showed that 8.6% of those polled feel the economy is “good”; up from 6.8% last month. Not surprisingly, consumer spending offered a sufficient increase in March to yield a 1st quarter gain of 3.8%, adding to the 4.2% improvement in the 4th quarter 2009.

The factors most likely driving the improvement are the labor markets, stock market gains and Spring. Better weather and rising stock market values are always welcome signs and provide a meaningful improvement in consumer confidence levels, especially this year as we’ve recently passed the one year anniversary of the market lows that followed the economic crisis and resultant recession.

Analyst expectations for March job gains, to be reported at the end of the week, run as high as 200,000 for the month. The ADP report released this week shows a decline in private, non-farm, non-seasonally adjusted jobs of 23,000. At the same time, the Department of Labor reported initial jobless claims fell by 6,000. The difference between the reports and analyst expectations can be seen in government jobs, including those offered by the BLS (Bureau of Labor Statistics) for the 2010 Census. By May 2010, the 2010 Census effort will require as many as 800,000 part-time, temporary workers in addition to those full-time workers already hired. These numbers aren’t likely to have any significant impact on the BLS’s unemployment statistics due to their seasonal and part-time attributes, but may contribute as much as ¼% to 2nd Quarter GDP.

Newspapers reported a February increase of 13.1% in employment related classified ads and internet based classifieds rose by 19.6%. The results won’t drive the unemployment figure down as much as we might hope, but for those households in which workers returned to the ranks of the employed, the recession is finally over.

Inflation remained moderate in the face of a March personal income increase of .7%. The personal consumption expenditure price index (PCE) year-over-year gain fell to 2.1% versus 2.4% reported in February. Though “Inflation Hawks” and “Gold Bugs” continue to make sound inflation alarms, there simply isn’t anything on the horizon to support their fears.

The 1st Quarter 2010 ISM Report (Institute for Supply Management) reflected continued growth in the overall economy for the 11th straight month, with the manufacturing sector having gained for in each of the last 8 months. Notably, for the first time in 46 months inventories edged up slightly.

THE TAKEAWAY – Just What Were They Thinking?

• The US economy is continuing to rebound at a strong pace. Though the 5.6% GDP gains of the 4th Quarter 2009 may not be repeated for 2010 as a whole, overall gains will be respectable and are likely to exceed 3 ½ to 4%

• Look for gains in Large Cap stocks as earnings reports and dividend increases are announced over the next few weeks.

• In the aftermath of the recent passage of important healthcare legislation, reports have continued to come forward over the “sweetheart” deals the Obama Administration and House Leadership made to insure the bill’s passage. Added to the constitutional challenge filed by thirteen State’s Attorneys General in the United States District Court in Pensacola, Florida the reports have already began to undermine the legislative effort and call into question whether or not the bill, already signed into law, will have any meaningful impact.

• That the US wants and needs a plan to deal with our growing healthcare issues is no longer in question; that our citizens, legal system and constitution are ready to accept a bill passed “at any cost”, is not only questionable, but mounting evidence is already showing large scale dissatisfaction.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC