It is hard to believe that it was two years ago that Bear Stearns collapsed into the hands of JP Morgan. As many believed it to be unfathomable, we now look back at the event as a mere drop in the bucket. However, the lessons learned do not have to be carried that far into the future to be applied elsewhere- Greece.

To get a summary of the current Greek Debt fiasco, one only has to look as far as the neighborhood playground. Within a matter of minutes, the entire landscape can change from a picturesque scene of children getting along (i.e. the European Union), laughing and playing to perhaps the more familiar model of not wanting to share or being able to play nice (i.e. Greece being the fat kid in the corner). Current headlines continue to peg a bailout on the resources of the International Monetary Fund and Germany, the two most influential players. And although no one in the EU will say they want Greece to default, the rise in exports from a cheaper Euro doesn’t exactly make a case for a quick resolution.

Greece has a large amount of debt coming due in May and is finding it difficult to refinance. Greek banks are losing counterparties to trade with, just as Bear Stearns did in the months ahead of its demise. In addition the amount of outflows from Greek banks and the lack of interest in Greece’s most recent bond offering point to higher interest cost to place the bonds.

Although a Greek default wouldn’t have the same impact as Lehman Brothers did on our credit markets, it will not be without repercussions. Interest costs would rise on Euro denominated liabilities, making it harder for businesses with European exposure to grow. The spreads available to investors will get more attractive, particularly with well placed investments. Although we are not supportive of a Greek default, our feeling is a Greek bailout would allow proliferation of irresponsible risk taking, in the long run, among global investors. The only correct solution is for Greece to make some very tough decisions and solve the problems on their own. Let us hope they can do that before it’s too late.

Sincerely,

Your THOR Team

The argument about the true cost of the health care bill is not being fought in Congress or by the CBO. Instead, it is being fought in the US Treasury market. The Treasury market auction last week had long- term yields moving higher and was met with less enthusiasm than past months. The bond market’s reaction is telling us that investors - especially international investors - believe the true cost of the plan is higher than what we are being told. Investors are sending a signal to the government that they will not fund deficits forever. We hope Congress heeds this message and picks up on something the rest of America already knows - you can’t continue to spend like drunken sailors (no offense to drunken sailors intended).

The stock market has had a nice run the past seven to eight weeks as corporations have upped earnings estimates. This was reflected in higher stock prices. We are, however, seeing some short-term signs of an overbought market. If corporate earnings coming out over the next few weeks are not at the high end of expectations, we could see a short-term pull back. We believe any such pull back would be short-term, as long-term trends still look good. We continue to watch the direction of interest rates as they may impact the long-term trend. If they continue to creep higher, they will at some point compete with stocks for investor dollars. We believe we are not at that point yet, but are watching.

Many of you are concerned about inflation. We have addressed this topic in our newsletter that we are sending out today. If there is a topic that you would like to hear our thoughts on, please let us know.

Sincerely,

Your THOR Team

More Government Spending?

Ask your friends or colleagues if they believe the U.S. Government should be spending more in order to get us out of the recession. The reaction we have gotten from both conservatives and liberals alike has been a resounding “NO” – many times it has been a resounding reaction. In our last update, we talked about how Americans are fixing their balance sheets. Polling strongly indicates that Americans want our government to do the same. Many are concerned about the deficit and it is now a leading issue for candidates. Republicans lost their majority in Congress due to their careless spending (i.e., the “bridge to no where”, Bush not vetoing any spending bills, etc.). It looks likely that the same outcome will beset the Democrats as well. Politicians, in general, seem to have an easy time spending our money.

Many of our politicians have looked to Noble prize winning economist Paul Krugman from the New York Times for additional support of their spending spree. Mr. Krugman believes that more spending is the answer to the current weak economy, with such action preventing a double dip recession as it did in 1937. We respectively disagree with him. In 1937, the main reason for the double dip was uncertainty. FDR won re-election in 1936 and started off with a robust agenda that caused uncertainty in the markets and with business leaders. In our opinion, specifically, two major policy initiatives caused the double dip recession. First, many of FDR’s initiatives in his first term were overturned by the Supreme Court. In order to prevent this from happening again, he proposed raising the number of Supreme Court Justices from 9 to 17 in order to insure the sustainability of his programs. Secondly, and even more destructive to the economy, he increased taxes for both corporations and individuals. For example, the Undistributed Profits Tax, which was enacted in 1936, made it less attractive for companies to reinvest their profits for long-term growth.

Our point is this - no country has ever taxed themselves into prosperity. Americans are not happy with government spending and, we believe, not in the mood for more taxes. Many are hoarding cash because of the uncertainty they feel both personally and in business. If Washington eliminated this uncertainty, it would go a long way in repairing our economy.

Sincerely,

Your THOR Team

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