Wednesday, June 1, 2011


From the Desk of Joe Rollins

You might be confused by my sentiment that May was satisfactory since all three of the major market indices lost money for the month. However, there are many reasons for my opinion, which I will explain in this post.

The biggest reason for my satisfaction with May’s financial results is that, in spite of all the geo-financial turbulence, the indices continued to support fairly handsome returns for the year. For example, while the S&P 500 had a total loss of 1.1% for the month, its return for the first five months of 2011 was still a positive 7.8%. To put this in perspective, for 2009, the S&P 500 had a total return of 26.5%, and for 2010, it had a total return of 15.0%. As you can see, this represents nearly two and a half years of excellent returns for the S&P 500 index.

The Dow Industrial Average, even though it lost 1.7% for the month, had an even higher return than the S&P 500 for the year through May 31st of 9.6%. The NASDAQ Composite lost 1.3%, but had a return of 7.2% for the five months ended May 31st.

At the beginning of 2011, I indicated that double-digit returns for any of the indices would indicate a very satisfactory year. Although we are only at the beginning 2011’s sixth month, the major market indices are seemingly on their way to completing that financial goal. The fact that we have endured one losing month in 2011 should not influence your resolve to continue to invest and save for your retirement years.

There were many economic events during May that continue to batter the stock market. Of course, we are still feeling the repercussions from Japan’s earthquake and its ensuing nuclear disaster in March, which has created virtually no gains in the Asian markets thus far for 2011. Even though the economies in China and Southeast Asia continue to be quite strong, the consequences from the events in Japan have drawn down the markets for the whole region.

In Europe, the anticipation that Greece will soon default on its debt – with Ireland not far behind – has made those markets highly volatile. I suspect that neither country will actually default, and it should only be a matter of time before these markets also pick up. Furthermore, the German and French economies continue to be strong. Through May 31st, however, there have been little gains in the European markets due to the uncertainties regarding sovereign debt.

Another component affecting the stock market is the serious increases in the price of most commodities. Once again, oil exceeded $100 per barrel and virtually all food commodities continue to accelerate in price. During May, however, many of these commodities suffered a decline due to the misplaced fear that China will force their economy to grow at a slower pace. In short, the failure of the commodities to grow during the first five months of 2011 was a drag on the markets as a whole.

As far as the U.S. is concerned, our Congress was still unable to get a budget together for 2012. Moreover, we are now four months from the end of 2011 and the White House has yet to offer any budget for the current year. Interestingly, the Senate voted unanimously last Wednesday to reject President Obama’s $3.7 trillion budget plan, and it also rejected the House-passed budget sponsored by House Budget Committee Chairman Paul Ryan from Wisconsin on a 40-57 vote.

Despite that news, it seems that Congress is finally getting serious about cutting spending even though the White House has not started practicing financial austerity in its spending habits. Hopefully Congress will drag them kicking and screaming into financial reality, which will be a positive for the federal deficit going forward.

The negatives discussed above might give you the impression that the stock market is in deep decline, but that notion would be wrong. As I’ve pointed out many times before, the stock market’s success is mainly dependent upon corporate earnings, which are nothing short of spectacular right now.

The 10-year Treasury bond is at nearly 3% today. No savvy investor is interested in buying a 10-year Treasury bond yielding 3% when anticipated inflation is in excess of 2%. Why would an investor take a 10-year position in a security that is likely to produce a negative rate of return over that time-frame? The Treasury market is being manipulated by short-term traders who are looking for a hideout for some of their money. It’s only a matter of time until this money shifts from an investment that is unlikely to gain much to one that has the potential for gains, like equities.

I’m very encouraged about future stock market performance based on current high corporate earnings and low interest rates. As money flows out of money market accounts earning next to nothing and CDs earning less than the rate of inflation, the equity markets will be the beneficiaries.

Strangely, while the market is trading sharply down today, this might be good news for investors. Reportedly, the downturn is because fewer jobs were added during the month of May. While this is undoubtedly a negative for the economy, it’s not so negative for equity investors. With the continuing weak nature of the economy, it’s highly unlikely that interest rates will be going up anytime soon.

Additionally, corporate profits continue to explode on the upside. The fact that businesses are not hiring and are operating with a minimal amount of employees to make profits is quite good. I reiterate that the secret to higher stock prices is higher earning. Only when interest rates become so high that they attract new money will stock price levels be challenged. I don’t see that happening anytime during 2011.

Even though the U.S. economy could hardly be considered robust – and is unlikely to be anytime soon – it is still slightly positive and extraordinarily stable. While our politicians have been clueless about the economy, they are moving in the right direction. All of these attributes will bring higher stock prices to investors. While the stock market certainly won’t experience a straight-up increase – it will more than likely experience a volatile and slow-rising increase – 2011’s rate of return should still be positive by double-digits.

While we only have five months under our belt for the year so far, it appears that we are well on our way to realizing the double-digit rates of return that I forecasted going into the year. And so, while May could be considered a lost month, in the grand scheme of investing it was still quite satisfactory.

As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins

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