There is one constant in the financial markets – emotions. All markets go through bouts of “fear and greed.” The length of these emotional ups and downs is different each time. It was only three weeks ago that we were receiving phone calls from clients who were very optimistic about the market. One client left the message “Don’t miss out on any of this good market action.” What a difference three weeks makes! We are now getting a handful of calls from jittery clients asking if they should cash out of everything. So what is THOR’s take on the current market? Before we review our thoughts, please remember that just a few weeks ago, when investor optimism was high, we were characterizing the market as overbought. In addition, we continue to have the lowest exposure to international stocks that we have had in our 18-year history as a firm. This continues to be a good strategy.

The main question is “Is this just a short-term correction in a bull market, or is this the start of a bear market?” In our opinion, this is just a short-term correction that is technically starting to reach an oversold condition. It is important at times like this to look at the facts and not make an emotional decision based on the current news on CNBC or other media outlets. Below are a few of the facts that we are looking at that cause us to believe this is not the start of a bear market:

• Banks are healed. In 2008, banks were significantly undercapitalized and many large institutions were on the brink of collapsing. Today, large banks are now overcapitalized and actually have more cash on hand than commercial loans.
• Interest rates. Almost all bear markets have been preceded by rising interest rates – especially short-term rates. Rates have not gone up. In fact, in the last few weeks, we have seen interest rates decrease with the yield on the 10-year Treasury note falling from about 4% to 3.26% today. The bond market also is very healthy. There are no signs of the liquidity crisis we suffered in 2008.
• Inflation. We do not see any inflationary pressures at this time. In fact, the problems in Europe are making the dollar stronger, which has a deflationary impact. Commodity prices are falling (in just the last 4 days, gold has come off the panic buying and is down over 4%). We don’t believe the Fed will raise interest rates anytime in the near future, which strengthens the prior argument about interest rates.
• Corporations are healthy and sitting on lots of cash (which can be used to repurchase stock, pay dividends or buy other companies). Please read the lead article in this weeks Barron’s which discusses this subject: click here.
• Put/Call ratio. A put is a bet on the market going down. A call is a bet on the market going up. In mid-April, there was significant call volume as investors were optimistic about the market. Today, the put ratio volume is significantly higher than the call ratio volume. In fact, the put volume is more than 3 standard deviations (occurs less than 1% of the time) from the norm. Even more striking, put volume is at its highest reading since 1995 – this encompasses the Asian crisis, technology stock collapse and the bear market of 2008. This reading shows extreme pessimism. This is a very good contrary indicator which says we are near the bottom of this short-term correction.

We know that many of you are concerned and we certainly understand. Please keep in mind that a short-term correction in an overbought market is actually very healthy in a bull market. Please don’t hesitate to call if you have any questions or concerns.

Sincerely,

Your THOR Team

Greece coming to America?

To say the last couple of weeks have been interesting is an understatement. The Greece problem boiled over, necessitating a bailout costing almost $1 trillion. Some of that money comes from the International Monetary Fund (IMF), of which the US is the largest contributor. America’s portion of the bailout is now over $50 billion. Some people are concerned that this could happen in the US. In our opinion, if it does hit, it will first hit the states and municipalities. For this reason, municipal bonds (as a whole) may be one of the most risky investments available today.

We are all aware of the problems that states and municipalities are having with their budgets. In Greece, the state unions are striking and protesting their austerity measures. In the US, public unions are fighting such measures in court. For example, in New York this week, the public workers union took Governor Patterson to court on his plan to reduce the state’s budget deficit by forcing workers to take a one day unpaid furlough. A judge put a temporary halt to the plan, ruling that that the furloughs violated collective bargaining agreements and would cause “irreparable harm” to workers. “In California, 18 lawsuits have been filed by public unions to stop Governor Schwarzenegger’s furlough program. In a time when many – including all employees at THOR – took pay cuts to help save jobs, it is unconscionable to think that the public unions are not doing the same. These actions only increase the risk of bankruptcy and defaults within the municipal bond market as it becomes tougher for states and municipalities to balance their budgets by reducing costs. Adding even more pressure to the states is the additional Medicaid spending they will be required to make because of the recently passed health care legislation.

If fear does hit the municipal bond market, it could be devastating to investors holding those securities. One has to be very careful about which municipal bonds they own and what assets secure such bonds. Our concern is that if we see any fear in this market, even strong municipal bonds will get hurt – just as strong mortgage backed securities suffered along with sub-prime mortgages. Other aspects of the municipal bond market add additional risks that most investors are not aware of:

• Liquidity Risk – The municipal bond market is a very highly fragmented market. In the “good-ole-days,” brokerage firms held municipal bond inventories which provided liquidity in the market. Currently, there is little liquidity in the municipal bond market.
• Accounting Risk – There currently is no uniform accounting standard for municipalities. This results in very little transparency.
• Disclosure Risk – Not only is there a lack of full disclosure in many municipal bonds, but it can take as long as 6 months after the end of their fiscal year for municipalities to provide financial reports. In many instances, the information comes much too late to react and bond holders suffer the consequences.

We applaud those brave politicians that are trying to reduce spending. Individuals and corporations have tightened their belts. It is time for municipalities, states and the federal government to do the same.

Sincerely,

Your THOR Team

Since our last market update on Greece, the market took a nose dive as
Greece’s deficit problems got worse and the yield on the Greek 2-year note
shot up to 19%. Greek bonds were downgraded to junk status. Both Spain’s
and Portugal’s bonds were downgraded as well. The vultures see wounded meat
in Europe and are starting to put major pressure on the PIIGS (Portugal,
Ireland, Italy, Greece and Spain). Even if Germany and the IMF save Greece,
are they willing to save the other PIIGS? This is a difficult spot for the
Merkel government to be in. Germans were never truly supportive of the
Euro – polling shows 55% of Germans were against joining the EU. Now they
are being asked to bail out their spendthrift neighbors. This could be the
start of the collapse of the EU.

We have been here before. In May of 1997, the Asian collapse began with
Thailand and Singapore spending millions of dollars to defend the Thai baht
against speculative attacks by the vultures (this is why George Soros was
given a death sentence in Thailand in abstentia). Over the next several
months, the vultures continued to attack the currency systems throughout
Asia, which ended in a worldwide financial meltdown in the 3rd quarter of
1998 (14 months after it originally started). Could the same scenario
materialize in Europe? Yes, especially if bond rates continue to remain at
current levels. As you are aware, we have the lowest exposure to
international investments in our firm’s history. We are reviewing the
day-by-day blows of the Asian collapse and comparing it to the EU problem.
There may be some great buying opportunities in the months ahead. When Asia
collapsed, we raised our international exposure significantly in our
client’s accounts. Our worst performing international fund in 1999 was up
55%. The key is to have some powder dry in order to take advantage of the
potential opportunity. Other advisers and individuals that currently have
40% or more in international stocks will suffer as foreign money rushes into
US Dollars for protection of principal and they will probably panic and sell
these funds. It is at that time that we believe we will be able to buy
great foreign companies at rock bottom prices.

Our biggest hope relative to the recent events in Europe is that it becomes
a wake-up call to our government to truly get their hands on cutting the
budgets. Both Bush and Obama promised to cut the budget and it has only
grown exponentially throughout both administrations. If they don’t stop
spending, the next currency collapse may be in the US.

Firm Notes

Mary Ann Ries will be leaving us on May 14th. With the passing of her
father a few months ago, Mary Ann will be working at the family’s fencing
business – EME Fence Company in Anderson Township. We are sad to see her
go, but wish her the best of luck.

Congratulations to Jim for passing the 2nd level of testing on his way to
becoming a Chartered Market Technician (CMT). Jim has only one more exam to
take in October.

Sincerely,

Your THOR Team