We have all heard the saying “this time is different”, and in this case it may be.  On the other hand, it may not be.  The stock market has been heading higher the past few months despite economic data that continues to show global weakness.  Below is a chart showing the Purchasing Managers Index (“PMI”) from around the globe.  Any index over 50 means expansion, while an index under 50 means contraction.  A few things to note about the chart: 1) the economies are linked – the direction of each country’s PMI follows closely with the others; 2) the overall direction is negative; and 3) all areas are showing contraction.  The US’s PMI dropped to 49.8% and the HSBC Flash China PMI for August came in at 47.5 – the official reading comes out next week.  In our opinion, the debt burdens of Europe and the US are the main culprits for this slowdown.

But won’t China save the day?  To answer this question, one only has to look at where China gets its growth from.  China’s primary method of growth is from selling goods to the rest of the world.  The rest of the world has pumped up China over the past few years by borrowing.  Think of it this way, it is similar to a department store offering a credit card to consumers who in turn use that credit card to buy goods and services from the department store.  It is a way to make growth look good.  Once the credit cards are tapped out; however, growth stalls or falls.  Because China relies on the rest of the world to buy its goods, there is stark evidence of a major slowdown in China.  So where will the growth come from?

We believe the most recent run up in the market has occurred because of words and not real economic factors.  For instance, Draghi says the ECB will support the Euro – Ground Hog day again – even though the European crisis is far from over and the September 12th Dutch elections may cause more upheaval.  Moreover, there are rumors of a possible QE 3 by the Federal Reserve.  Finally, the market may be anticipating positive sentiment from the upcoming election.  In our opinion, this is not investing on facts, but on rumors.

We believe it is still prudent to be cautious in this market.  Managing risk outweighs trying to achieve oversized returns.  We would rather give up a little on the upside until the election is over.  Once the election is over, some uncertainty will be removed and better investment opportunities will exist.  The investment opportunities will likely be different depending on who wins the election, but nonetheless they should be available.  Enjoy your Labor Day weekend!!!!

Sincerely,
Your THOR Team

Just like in 1998 when Asian markets and currencies collapsed, Europe might be the next best investment once the Euro falls – if it doesn’t drag on in such a way that it destroys the social structure of Europe. There is, in our opinion, another investment idea that might be more potent. This idea is to short long-term – 10-20 year – Treasuries. Treasuries will appreciate if interest rates rise, thus causing bond prices to fall. We believe this idea will work regardless of who is elected President in November; however, the timing of this investment is crucial.

If Romney is elected President, we believe business spending will increase because of perceived certainty in policy. The Federal Reserve has printed a lot of money over the past few years with very little impact on inflation. This is because people and businesses are hoarding cash like they did in the 1930’s. This in turn has caused the velocity of money – how fast money moves through the economy – to fall. If people and businesses stop hoarding cash causing money velocity to get back to normal, the risk of inflation and an overheated economy increase. In this scenario, the Federal Reserve will be forced to raise interest rates to cool down the economy.

If Obama is reelected in November, we believe interest rates will increase due to no budgetary discipline. For the past 12 years, there has been a lack of leadership in controlling government spending. We have consistently berated both administrations during this time on this point. If we don’t start to get serious about our borrowing, interest rates will have nowhere to go but up – as they have in Spain, Portugal, Italy and Greece – because investors will demand a higher rate of return for the risk they will be taking.

The timing of this investment is important. One of the reasons US interest rates have fallen is because of buying from central banks, businesses and individuals in Europe. We have heard from some European central bankers and our international fund managers that this has been occurring for the past 6 months. Europeans are trying to protect themselves from a possible collapse of the Euro. A better time to make this trade is when the Euro crisis comes to a head and the additional fear drives Europeans to purchase more US Treasuries than they presently are.

Sincerely,

Your THOR Team

What a difference a decade makes. At the beginning of 2000, if you mentioned that you should be buying high dividend paying stocks at a cocktail party, you would have been laughed at as a complete idiot. Now, many pundits advocate buying mega cap, dividend paying stocks. These stocks are also being touted as a safe alternative to bonds and cash. Are they?

Let’s look at what type of companies pay dividends. These are usually large, mature companies with a significant portion of their revenue generated overseas. Europe’s problems and a rising dollar are a major headwind for these companies going forward. They typically pay out a nice dividend. Why? Because management cannot reinvest earnings back into the company at a reasonable growth rate, and thus, it makes more sense to return the money to shareholders through dividends. For this reason, high dividend paying stocks tend to not grow as fast as non-dividend paying stocks. That is why those stocks tend to sell at a discount (as measured by the price/earnings ratio or P/E ratio) to faster growing companies.

Presently, however, dividend paying stocks are selling at their highest valuation to non-dividend paying stocks since 1975. Please see the chart below. The time to buy dividend paying stocks was at the beginning of 2000, not today. Moreover, with the tax rate on dividends scheduled to rise from the current 15% rate to 43.4%, dividend paying stocks become even less attractive.

Europe Update

Last week, Mario Draghi, head of the European Central Bank, mentioned that he will do anything to save the Euro. After that comment, the market rose. Many people assumed this comment meant that the ECB would be buying sovereign debt in Europe. We find this hard to believe as Northern Europe – including Germany, Finland, Belgium and the Netherlands – is against the ECB buying the debt of Spain and/or Italy. We have heard this from European leaders before. In our opinion, it is just another head fake to help Spain sell bonds at lower rates over the next few months.

So what does this mean for the market? The perceived safest part of the market could be the worst performing investment over the next few years. Investors should be careful buying large company stocks paying high dividends. Don’t be fooled by the ECB’s position. It was less than a week ago that protestors were out in droves in Spain protesting against austerity. The time is coming to be more aggressive with your money – it may occur in the next few weeks or months. We are prepared to make investments in undervalued assets in order to benefit from the next move up in the market when the risk to investing has dissipated.

Sincerely,
Your THOR Team