Individuals are Getting Their Balance Sheets Healthy

The past year has served as a wake up call to individuals about the risk of too much debt. Many have reduced their spending and are now saving more. Frivolous spending has been replaced with saving. Cash is king and the “good ‘ole days” of living on borrowed money is over for now. People are getting their financial houses in order. The proof is in the statistics:

- As the chart above demonstrates, the personal savings rate has jumped in the last year as consumers hunkered down and stopped spending. Please keep in mind that this savings rate does not include any contributions to 401K plans.

- The increase in the savings rate equates to real savings. The above chart shows that total Personal Savings have jumped from approximately $150 billion in 2008 to over $500 billion today.

- Savings are up and debt is down. According to the Federal Reserve, credit card balances were down 9.5% in 2009 or slightly more than $91 billion and consumers now owe less than what they did at the end of 2006.

In 2002, after the collapse of Enron and MCI because of too much debt, corporations began to shore up their balance sheets by reducing their debt. Like 2002, we believe a sea change is occurring now within the US – spurned by the continued spending of our government. Such spending has created a large amount of anger in our citizens. If our politicians listen, this anger, we believe, will lead to the next wave of savings, namely, a much needed reduction in Government spending. All polls indicate that government spending is one of the major concerns of all our citizens - both Democrats and Republicans alike. We believe it will not be fashionable to “bring home the bacon” for politicians in the future. The free spending days of the Government are rapidly coming to an end.

Sincerely,

Your THOR Team

The Problem with Wild PIIGS

For years, we at THOR have talked about the potential problems with the European Union (“EU”). As long as there are no stresses on the system, the system works relatively well. However, our real concern with the EU was if and when one of the weaker countries ran afoul of the rules and put a strain on the entire system. Would the stronger countries like Germany and France come to the rescue? Anyone with a sense of economic history knows that the weaker countries (the PIIGS – Portugal, Italy, Ireland, Greece and Spain) have a long history of overspending and devaluing their currencies to spark economic growth when they fell into a recession. Today’s problems in Greece should not come as a surprise to the strong countries in the EU. The PIIGS have lived off the trough of lower interest rates as a result of the credibility EU entry brought them, which compounded their spendthrift ways with easy money. Those days are now over as interest rates have risen in the PIIGS.

The question is what should Greece do now? It must stop spending and change people’s reliance on the government. If the government unions and general population fail to change their ways, then Greece should be kicked out of the EU. Otherwise, any other rescue plan will only “kick the can” further down the road and cause the entire EU system to fail, with a much higher cost. This also would be a powerful statement to the other PIIGS and hopefully force them to discontinue their profligate ways. If Greece is kicked out, it represents a mere 2.6% of Europe’s total economy. Such action would likely strengthen the remaining countries in the EU. Greece would be the country to suffer (as it should) while the other countries in the EU that have abided by the rules would be saved.

How does this issue affect your portfolio? Our model continues to have us underweighted in international securities. In addition, most of our international funds are currently overweighted in the Pacific Basin (especially Japan). If the Euro continues to falter, we will look for an opportunity to increase our international exposure, especially our European exposure. This could be a similar situation to 1998 when Asian currencies collapsed and we were able to buy international companies at a fraction of their value compared to their US counterparts. Whichever way the Greece story plays out, we will be looking for an opportunity to benefit from it.

Sincerely,

Your THOR Team

The January Effect Revisited

In our last market update, we talked about “the January effect”, a phenomena in which a positive market in January has a high correlation to a positive market for the entire year. Below is a copy of that e-mail:

“The January Effect

This is an anomaly where the stock market rises during the first week of January. The explanation to why this occurs is that those investors that sold off in late December to capture gains/losses in their portfolio reinvest those assets back into the market at the beginning of the following year. The anomaly occurred again this year with the Dow rising +1.8% and the S&P 500 rising +2.7% during the first trading week of 2010.

The first week anomaly is interesting; however, what is more important is how the stock market performs for the whole month of January. Positive January market performance sets the stage for the entire year. Since 1950, there has been only two years (1966 and 2001) when the stock market (S&P 500) was up in January and ended down for the year. If the market remains positive for the month of January, the odds are in favor that the market will perform well in 2010.”

What happens when January is Negative?

Many stock market indicators are good barometers in one direction, but not in the other. For example, having a large percentage of insiders buying their own company stock is almost always a very good signal to buy that stock. Why? “Insiders” typically are privy to information about the future prospects of their own company that is not widely known and if they are willing to put their money into buying shares, then this may be a good indication to an “outsider” to invest in the same company. Many investors automatically believe insider selling is bad for a company. This is not necessarily true. Many times, insiders sell for other reasons (portfolio diversification, planned sales, tuition payments, new purchases, etc.) than just the share price. Insiders buy for one reason - they believe the stock is undervalued where as there could be a host of reasons for selling. That is why insider buying is a better indicator than insider selling. The same thing occurs with the January Effect.

The January Effect works over 90% of the time (these are very good odds and better than any you could get in Las Vegas). The question is: does it also work in reverse when stocks fall in January? The answer is no. Since 1950, the stock market has produced negative returns for the month of January a total of 23 times. Of those 23 negative January months, stocks were lower in 12 of those years and positive in 11. In other words, there is only a 52% (12/23) chance that the market will be negative at year end because stocks were negative in January. Statistically, this is not a good indicator to tell you how stocks will perform for the whole year. It truly is a coin flip on whether they will be positive or negative. A perfect example is 2009. The S&P 500 was down -8.43% in January and ended the year up 26.5%. Those that sold off in February because stocks were negative in January missed a significant money-making opportunity the remainder of the year.

Sincerely,

Your THOR Team

The January Effect

This is an anomaly where the stock market rises during the first week of January. The explanation to why this occurs is that those investors that sold off in late December to capture gains/losses in their portfolio reinvest those assets back into the market at the beginning of the following year. The anomaly occurred again this year with the Dow rising +1.8% and the S&P 500 rising +2.7% during the first trading week of 2010.

The first week anomaly is interesting; however, what is more important is how the stock market performs for the whole month of January. Positive January market performance sets the stage for the entire year. Since 1950, there has been only two years (1966 and 2001) when the stock market (S&P 500) was up in January and ended down for the year. If the market remains positive for the month of January, the odds are in favor that the market will perform well in 2010.

Sincerely,

Your THOR Team

The New Year

2009 ended up being a very good year for the US stock market. And yesterday’s gains provided an optimistic beginning to the New Year. While we welcome the positive stock market, we recognize the potential risks and remember very acutely just how quickly such gains can be derailed. However, we believe we are in the middle stage of a bull market run where the economy shows signs of improvement and catches up to the stock market. Evidence of this can be seen in the manufacturing indexes (such as the ISM Manufacturing Index & the Chicago PMI) which are clearly showing signs of improvement.

With that said, there are some areas that are getting extra attention in our analysis including the impact of congressional policies on the economy (particularly cap & trade, healthcare, and financial reform), the withdrawal and/or spending of various stimulus programs (the vast majority of last year’s stimulus plan will be spent in this election year), the impact of the FOMC’s interest rate decisions, and extraordinary events such as sovereign debt default and terrorism.

Recognizing the numerous economic obstacles that still need to be maneuvered around, there may soon be a time for us to take a slightly more conservative stance within your portfolio to not only insulate against such events, but take some of the profits we have made over the last year “off the table”. We are watching a number of indicators and will not hesitate to adjust your portfolio if need be.

On a side note…

While the threat of terrorism once again dominated the front pages on Christmas Day for the nation, we offer our prayers and peace to all of those it affects for the upcoming year.

Sincerely,

Your THOR Team

Death of the Euro???

Almost every day you read an article or hear a story about the fall of the dollar. We believe there is a greater story occurring across the pond: the possibility of the euro collapsing. We believe for this reason we are starting to see the US dollar strengthen as money starts to flee Europe for the safety of the US.

What would cause the euro to collapse? In the current scenario, weakness from countries that have poor financials is causing great stress on the system. Specifically, you have Greece and Ireland that are, in essence, bankrupt. Italy and Spain are not far behind. During past financial crises, countries such as Italy could devalue their own currency and thus increase exports and spark a recovery. Being part of the European Union prevents individual countries from taking such isolated steps. The biggest question at this time is: will the stronger countries (Germany, France) come to the rescue of the weaker countries? Time will tell. But, just imagine if America was asked to bail out the poor fiscal practices of Mexico. Would the American people want to? Probably not. Nor do we think that the French or Germans will be excited about doling out the necessary fiscal medicine to cure their neighbors’ problems. This is a true test of this grand experiment. Stay tuned.

Sincerely,

Your THOR Team

Mark and I remember March of 2000 when several individuals called to inquire about our opinion of Cisco - during the two days when it was the largest company in the United States based on market capitalization. When we asked these individuals if they knew what Cisco did, not one of them could tell us. To us, that was a tell tale sign that the technology bubble was about to pop. This same phenomenon occurred last year when many were asking about oil when it was over $140 a barrel. Today oil is in the mid 70’s - down 50% in value since last year. Eerily, we are now getting similar questions about gold. Last week, three clients asked me for our opinion on gold. The feeling I had was similar to the technology and oil bubbles. Can the run in gold continue – sure it can. However, we believe there is greater risk of a correction in gold prices than an increase in gold prices. Gold is selling for two reasons. The first is the fear of a total collapse of the United States financial markets. We don’t believe that is likely. The second is for a hedge against inflation. In order for inflation to exist, you need continued growth in the money supply. During gold’s last run in the late 70’s, the money supply was growing at a 13+% annual rate. The latest numbers show that the money supply has shrunk - not expanded - since June of this year. This is deflationary, not inflationary. Such a drop in the money supply does not bode well for gold’s continued ascent.

To see this trend, click on the link below. The Federal Reserve pumped money into the financial system late last year to provide liquidity during the financial crisis. They are now taking away the punch bowl. You can see this change in the MZM index. The MZM index is a broad money supply index that measures financial assets redeemable at par value. It includes M2 and all money market funds.

http://research.stlouisfed.org/publications/usfd/page5.pdf

Getting back to work

With the unemployment rate at its highest rate in 25 years, many are asking if things will get better. The answer is yes. In some sectors it is already getting better. According to Forbes magazine, there are some businesses actually hiring: Sub-Zero has just added 165 people; Bank of America has added 3,000 people; and Cisco recently took on over 1,000 people. These are bright spots. It appears that those companies with overseas sales are hiring back first. Due to the drop in the value of the dollar, American goods are considered “cheap” on the world’s stage. This is causing many companies with overseas sales to increase production, and thus personnel. The road to job recovery, however, could be longer than expected. As stated in the November 16th issue of Forbes, “Hiring usually picks up long after a recovery is under way. That trend is getting worse. Unemployment lagged the larger economy by five months in the 1982 recession, by a year after the 1991 slide, and by two and a half years following the tech slump in 2001.” The best way to add jobs is to remove uncertainty (cap and trade, increased taxes, etc.) and entice more hiring with tax cuts for businesses.

The joyous season returning

The stock market continues to power ahead. The weeks before Thanksgiving and the month of December tend to be very good for the market. Last year, they were not. It appears we may be getting back to some normalcy. From 1926 through 2004, the average monthly return for November was +1.4% and +1.7% for the month of December. This month’s return so far is well above its historical average. This bodes well for December as well. Maybe some of the investment axioms of the past (”January Effect,” “Santa Claus Rally,” etc.,) are starting to come back in vogue.

We want to wish you and your family a very Happy Thanksgiving. We at THOR are very thankful to all of you for the trust you place in us. We, of course, are also thankful for the significant improvement in the financial markets from a year ago!

Kindest Regards,

Your THOR Team

As you may know, consumer spending makes up almost 70% of the US economy. If you look on the surface of the latest monthly retail sales report, the negative 1.5% drop gives a bearish sentiment. However, after looking deeper into the numbers, we find that after accounting for the termination of the cash for clunkers program, retail sales actually rose 0.5%. This was the second month for a surprise increase. Also pointing to a revived consumer was yesterday’s 3rd quarter GDP which came in above the 3.0% estimate at 3.5%. The positive here isn’t the “better than expected” increase, or even the increase above the 2nd quarter’s -0.7% decline, but where we saw the increase. Personal consumption increased 1.35% (after backing out the positive impact of cash for clunkers). Although the consumer spending rate is a delicate balance with the consumer savings rate, we welcome the current findings as being a positive for the general economy.

What we do not find so positive is our government’s uncanny ability to spend money. The US Treasury has completed another record week of debt issuance at $123 billion. The Federal Reserve is ending their purchase of US Treasury securities today (the quantitative easing program) at the same time the Treasury is planning to issue longer dated bonds (increasing the Treasury’s duration). Our concern is if the yield curve can’t adapt to the coming changes in supply / demand, it will mean higher interest rates for everyone, hindering credit and ultimately growth.

It goes without saying that these two topics are a few of the many we are continuously monitoring. Although October finished just under where it started (S&P 500 index at 1057 on 09/30/09), we had approximately 80% of companies report earnings above their estimates enabling the S&P 500 to reach a high of 1098. We will continue to monitor the state of the economy and position your portfolios accordingly.

We thank you for your continued trust and confidence in THOR.

Kindest Regards,

Your THOR Team