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Inside Business The Hampton Roads Business Journal Insidebiz.com

July 12, 2010 $1.00 Second quarter 2010 – from with love? By Jim Flinchum are nice, but it will take real www.baycapitaladvice.com political courage. Former Fed Chairman Any discussion of whether said the economy has run into an "invisible the U.S. should consider this wall," which is common during economic approach should begin at recoveries. Economic data may be www.usdebtclock.org. invisible, but it does measure real, visible things. Pending home sales were down 30 The markets percent in June. GDP growth in Q1 was The continues to be revised down, as less than earlier reported. volatile, with the Dow down 10 Car sales dropped 12 percent. The ISM percent in Q2 and 6 percent year report of manufacturing activity came in to date. In fact, it was the worst weaker than expected, and consumer 2nd quarter since 2002. Perhaps confidence just tanked, dropping 10 points the most unnerving thing that to only 52. happened in the stock market during Q2 The economy Today, we are shellshocked from the was the bizarre "flash crash" on May 6, GDP growth in Q1 was revised down Great , frightened by a possible when the Dow dropped almost 1,000 points from 3 percent to 2.7 percent. It is collapse of Greece now and later, in what one trader called "a 30-minute free- surprising this added weakness occurred intimidated by the bizarre "flash crash" of fall into hell." While it is still unclear why when corporate earnings beat expectations May 6, confused by the new financial it happened, it is clear that it was not related 77 percent of the time. When Q2 growth is announced, it is expected to be even less. reregulation, genuinely depressed by to the economy but was some The question most debated currently is American impotence in dealing with the technical/computer aspect of trading. The whether we are headed into another greatest environmental disaster in our regulators have already instituted some recession. The highly respected Economic history, and the unrelenting pain of another trading changes, hopefully to preclude any Cycle Research Institute in New "jobless" recovery. recurrence. publishes a weekly graph of its leading The latest Report looked good at The real problem is that it further economic indicators. A recent one is shown first, because the rate erodes investor confidence. One of the on this page. dropped from 9.7 percent to 9.5 percent. main reasons the market has been so You can see the sharp improvement in Unfortunately, that was not because we volatile this year is because the retail the leading indicators last year, followed by produced so many jobs, but because investors, who are traditionally stable, have a sharp, scary drop this year. Each time the 650,000 people got so depressed they just been largely on the sidelines. Most of the light trading volume this year has been index has touched the dotted line, the stopped looking for a and dropped out. done by institutional investors and hedge- economy was in recession or within two Still, there are 14.6 million people who funds, who have "trigger-fingers." months. Some believe the economy is would like a full-time job and cannot get However, while we are feeling sorry getting over the "sugar high" from the one. People are also economic resources, for ourselves, we shouldn't forget that most and, they may be right. and it is a shame to waste such a vital foreign markets did much worse. Here are Some argue that another recession like resource. some percentage declines for other stock the Great Recession is unrealistic because markets this quarter: (1) BP is no , (2) the Fed Continental drift is stuck at zero, (3) upcoming mid-term Ironically, Europe, which has a long U.S. (S&P) -11.5 elections will be more pro-business, (4) the history of being more "socialistic" than the -12.7 CEO hiring confidence is at a three-year , is reversing course. At the G- -14 high, and (5) productivity is still rising, 20 meeting late last month in Toronto, it -14.6 mostly due to technology. was the U.S. arguing with Europe not to -14.8 I tend to agree with analysts like Bill stop stimulating their economies too soon. -15.1 Gross of giant PIMCO and John Mauldin Europe was so terrified by the recent near- -18.6 of Frontline Thoughts that another death experience of Greece that it agreed to -20.5 recession is less likely than a long, cut their annual budget deficits by 50 -22.4 sustained slow-motion recovery, as we percent within three years. Bold statements Greece -39.3 deleverage or reduce debt. INSIDE BUSINESS www.insidebiz.com

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Lastly, we tend to overreact to companies. Plus, if we do experience paying almost anything to put their money . We have been through many another economic "heart attack," it will in something "safe." We think that before. They are part of the normal come through the financial sector. Treasuries are a bubble and are avoiding economic cycle. Remember: The only We like foreign currencies. The recent them. people standing in lines these days are not 14 percent YTD increase in the dollar We keep our other bond maturities waiting for bread or gas or apples... but for against the is not sustainable. Because short, because the rise in interest rates that electronic Apples. Europe is leading the way in dealing with will follow will crush the values In 1979, President Jimmy Carter gave their governmental balance sheets and of those bonds now. For the income- his famous "malaise" speech that we "can- because their exporters will benefit from oriented investor, we do use some closed- do Americans" were suffering from an the devalued euro, we are selectively end bond funds with short maturities or emotional depression, not an economic one interested in the stock of European select preferred stocks. - one where we were losing our self- exporters. And we remember that Jimmy Carter confidence and starting to doubt ourselves. But overall, there has been no change was right, that Americans are a traditionally Maybe it is 1979 again? in our appetite to increase our equity can-do people who don't doubt themselves exposure right now, as we expect the stock for long. How we're managing it market to trade sideways until later this For stocks we are neutral on, we plan year, when we expect the economy will to sell most of those stocks that we have have had a chance to catch up to the still- significant gains on, to beat the higher overly bullish stock market. Don't forget capital gains taxes coming next year. It is a the Dow is still 3,000 points higher than Jim Flinchum is the personal financial good time to raise extra cash on hand. March of last year. Besides, the markets adviser at Bay Capital Advisors in Virginia Because nobody yet understands the usually improve after midterm elections, Beach. He is a member of the National over 2,000-page financial regulation bill, when political uncertainty decreases. Association of Business and can we will continue to stay away from Two-year Treasuries recently hit an all- be reached at www.baycapitaladvice.com. financial stocks, like banks and insurance time low yield, because investors are

We tend to overreact to recessions. We have been through many before. They are part of the normal economic cycle.