April 15, 2010 Market Update
Did you read my last update carefully? Note I said that January 19th could turn out to be the high for the year. Well, pretty wrong. The S&P is up about 50 points or almost 4%. The TSX is up almost 200 points or almost 2%. And I said that we were in for a slow but sure downward spiral. There does not appear to be much retail money in the market though. Most of the buying and selling seems to be between banks and hedge funds.
And yes, I realize that the market trend still is up. But consider the following pieces of information:
1. US office vacancy rose to 17.1% from 15.2% a year ago.
2. Household and business credit contract 13 billion dollars for the week of March 24
3 The US ADP jobs survey showed a drop of 23,000 in March and a combined total drop of 255,000 in the past three months.
4. There were more then 158,000 personal bankruptcy filings in March. That is up 35% from February and up 19% from March of 2009 (And we're in a recovery?)
5. Consumer confidence rose to 52.5 in March. However in previous recessions the index average is 71 and during a recovery the index is generally about 102.
6 . There seems to be a view that the American government will continue to come in and solve all the economic woes of the world. This despite the current 1.5 trillion dollar deficit.
7. The American government is talking about changing the rules so that all homeowners who are currently "underwater" will have their mortgage balance reduced. By the tax payer.
8. Wages are deflating. Unit costs are down 4.7% year over year
9. The total unemployed in the US who have been looking for work for at least six months has soared to 6.5 million in March; up from 3.2 million one year ago when the market was at the bottom.
10. The average duration of unemployment just hit 31.2 weeks, up from 29.7 in February. This would make it very likely that when they are hired back they will find a job at a lower wage then before they were unemployed.
11. Residential rents dropped 1.5% year over year and vacancy is at a 26 year high of 26% in the US
12. Approximately 30% of US manufacturing capacity is idle
Does that sound like a market you want to be buying in to? Or one that you should be selling.
As you read through this you may be thinking that all this is well and good but it is all about the US market and does not address our Canadian market. And that is true. But, what makes the Canadian market strong? Only our ability to sell commodities into the US market and if the American market continues to contract this will catch up to us soon.
Deflation continues to be the enemy. In a period of deflation the bond market will allow us to make some money.
The other big enemy is sovereign debt. Once again we are reading about the Greeks defaulting on their debt. The cost of insuring against the risk of a Greek default rose. Greece's five-year sovereign credit default swaps rose to 4.1 percentage points, from 3.90 percentage points Tuesday, according to CMA DataVision, meaning that it cost €410,000 ($549,605) annually to insure €10 million of debt for five years. By comparison, it cost €31,600 to insure the same amount of German debt against default.
Today we did notice that money did flow to buy US debt. Both short and long bonds were up. ( You will recall that when prices for bonds are up, yields are down.) This speaks well to our idea to move into the bond market when we did. When money flees the equity market it will run to safety and that safe haven is still Canadian and American government bonds.
As has been stated by someone else before, "We live in interesting times".
Continue to pay down your personal debt. Hold cash. Invest in Canadian government bonds or good income paying equities.
On a little different note, I did recently make three budget presentations to different groups. I would be willing to do that more often if you are part of a group that might benefit from such a presentation. I will try to show you how to build a budget and also how to live within that budget.
Anecdotally, many people do not live within any kind of a budget. They just spend what they have. Or, even worse, some are learning from our government officials. They think they can borrow their way to wealth.