Obsolescence

Several years ago my wife and I considered a Portuguese Water Dog (PWD) for a family pet. Unfortunately, a breeder informed us that Catherine (then, age 3) was too young to be able to effectively discipline the dog. Even though we did not get a PWD, I uncovered some very interesting information while researching the breed. Years ago, PWDs were paid the equivalent of a man’s wages for the work that they performed. Since a PWD can swim underwater they were utilized aboard ships to retrieve ‘overboard’ items, round up broken nets and swim messages between ships. Unfortunately, the breed became obsolete and was almost lost after technology (electronics) was introduced aboard vessels.

I write to tell you this not because we considered a PWD before Obama but as an intro to an observation regarding technology, obsolescence and US manufacturing.
US manufacturing has been declining in terms of its share of overall US employment since the late 1970s. During the past decade, the number of workers employed by manufacturing has fallen from 17.3 million in 1999 to 11.7 million last year, according to the Labor Department. However, according to the US-China Business Council “the US share of global manufacturing is just over 22% - the same as it was in 1995.” In fact, according to the Bureau of Labor Statistics, “the US led the world with its 7.7% gain in manufacturing productivity in 2008-2009.”

What has declined in not manufacturing output - but manufacturing employment. The primary reason behind this is major gains in productivity; productivity advances achieved primarily through the use of technology. US companies that have survived as competitive global manufacturers have shifted from low-skill manufacturing jobs to those requiring higher skill sets, employing those with the knowledge to handle new technologies.

To reverse this decline in manufacturing employment Obama has vowed to "do every single thing we can to hasten our economic recovery and get our people back to work." and last year signed "The Manufacturing Enhancement Act of 2010 (to) create jobs, help American companies compete, and strengthen manufacturing as a key driver of our economic recovery.” Despite a number of initiatives the administration has undertaken, the job market remains sluggish. In fact, the unemployment rate has stayed flat at a near record high of 9.5 percent. Is unfair foreign competition to blame? Or is there more to the story?

One can well argue that unemployment benefits incent people not to look for work, but we will save this for another discussion.

Unfortunately the gains in manufacturing productivity have been lost on the current administration. Instead of trying to create low paying manufacturing jobs, the focus in my opinion, needs to be on educating workers and soon-to-be workers so they can handle the higher skilled jobs upon graduation, and not on competing with low wage countries for low paying manufacturing jobs. We are pursuing policies which will make some of our work force obsolete sooner or later, just like the PWD years ago.


Securities and Investment Advisory services offered through NBC Securities, Inc., member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities, does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.

This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.

Year-End Reflections

A wave of sovereign debt dilemmas, an earth quake in Chile, a Gulf oil rig explosion, a "flash" crash, a Gold rally, sovereign debt aftershocks, a mid-term election and then another debt debacle in Europe; the year of 2010 is behind us, thank goodness. If we were looking at a snapshot of the market taken at the beginning of the year, and another taken today, we would be hard pressed to find many significant changes. 3 out of every 4 stocks listed on the NYSE entered 2010 in a positive trend, and about as many will exit the year trending higher. Within the 40US economic sectors, 5 of the top 10 sectors at the beginning of the year are among the top 10 as we exit the year. 6 of the bottom 10 sectors entering 2010 are among the bottom 10 exiting 2010 as well. Had we not lived through 2010 we might come to the conclusion that very little change actually came to pass during the past 12 months. By comparison to 2008 & 2009 the past year could arguably be described as mild. It has been one of those years where when the dust settles, all the major domestic equity indexes will have had positive returns, with double-digit returns for the equity markets.

Despite all that has occurred on the surface of the market the words "what is, is" comes to mind as the leadership within the market has a very similar complexion to that of a year ago. The primary market indicator remains positive, albeit in overbought territory. Despite an exhale in the market since a peak in early November, trends remain positive. Certainly these things can change, and at some point they certainly will, but for now we see a market that remains generally strong longer-term but far less overbought near-term than we were just a few weeks ago.
Both domestic and international equities remain emphasized. Large caps have been out-of-favor relative to mid and small caps for the duration of 2010. Masking this a year in which knowing where to be in the market was more valuable than knowing whether to be in the market. 2008 was obviously an example of knowing whether to be in (or out of) the market, as equities were out of favor for the duration of the year. The International market leadership still points to the emerging markets. Weakness in the broad fixed income asset class continues as interest rates rise and demand falls. The 10 year yield index (TNX) has risen from 2.30% to 3.45%. Commodities continue to remain resilient overall.


Securities and Investment Advisory services offered through NBC Securities, Inc., member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities, does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.

This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.

Is Gold the Favored Metal?

So far in 2010 the S&P 500 Index has experienced a 9.50% return while the GreenHaven Continuous Commodity Index (GCC), an equal weighted commodity index, has seen a gain of nearly 17.08%. Much of this year’s return has been driven by metals, more specifically; precious metals. And, while commodities have outperformed equities this year, commodities have been an area of strength for the past decade.

The media has given you the impression that Gold was leading the precious metals race, while in actuality we find that Palladium and Silver are actually outperforming gold by a substantial margin. And while fear-mongers and gold peddlers are urging you to buy gold (and guns) and store it in your backyard, both Tin and Copper have beat the S&P 500 and Gold, and Cotton is up 85.78% for the year. So this may be a good time to buy linens, particularly high count Egyptian cotton sheets before prices increases work through the system.

Gold, while up 26.84% for the year is underperforming a basket of 20 Precious Metals related company’s stocks, which, as an aggregate, are up 36.55% for the year. So, a case can easily be made for turning to commodity-related equity ETFs as a way to get exposure to both commodities and equities. Now that we know what choices we have, the question is, "should you own the commodity ETF or a commodity-related company ETF?"

For answers contact me-

Securities and Investment Advisory services offered through NBC Securities, Inc., member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities, does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.

This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.

Shifting Economic Power

Recently, the G-20 meeting took place in Seoul, South Korea. The participants stated goals prior to the event were to “ensure global economic recovery and strengthening the global financial system”. I am offering no commentary here, as to the outcome.
The main economic council for ‘wealthy’ nations was expanded from the G-8 to the G-20in September 2009. This major shift in G’s is significant and confirms that emerging markets can no longer be ignored, as the current composition of the G’s serves as an accurate ‘mirror’ of where economic power currently resides.

Importantly: economic power is no longer measured in terms of output– consumption is equally valued.

When I ran a relative strength analysis of the G-20 participants emerging market members sat atop the grid as follows: Turkey, Indonesia, Mexico, and India, while the lower ranked participants come from developed markets - Germany, Italy, France, and the European Monetary Union (the EU is a member organization).

As the G-8 has evolved into the G-20 we too must evolve our portfolios to mirror this shift in economic power.

Putting your head in the sand is not a portfolio strategy

Many investors are frustrated at the perceived lack of results from the quick fixes enacted to stimulate the US economy, and thus remain wary of investing in equities. Money flows are still showing net reductions in equity funds and inflows to bond funds, with the ten year treasury yielding approximately 2.7%!?!

I believe this is wrong; there are a lot of opportunities ahead and the theme is ‘global’: global growth, global demand, global business opportunities and global investment opportunities.

Let’s examine the facts. Post WW II there were 600 million consumers between Europe, Japan & the US coming-on-line. Today, there are 2.5 – 3 billion (yes, billion) consumers coming on-line in the emerging economies. And while developed economies like (western) Europe, Japan & the US may lag, developing economies such as (eastern) Europe, Latin America, Asia and even parts of the Middle East are experiencing expanding economies. First-hand experiences travelling the world taught me that people with increasing affluence want to consume; the progression I observed is as follows: American cigarettes (Marlboro) and alcohol (Budweiser & Johnnie Walker; red & black), boom boxes, TVs and refrigerators, a more powerful motor bike and then an automobile. Already, automobile manufacturers including GM and Mercedes are having their Chinese design studios contribute greatly to the designs of new automobiles, thus enhancing global (and domestic) sales. Today, Mercedes sells more top-of-the-line cars in China than in the US. Bottom line, there is a lot of pent-up demand because of the desire to live the ‘good-life’ enjoyed in the West.

The growing affluence of the masses living in what is best described as ‘emerging markets’ and their consumption habits are where I believe the best potential for investing will reside for some time to come. US companies positioned to capitalize on this growth in demand will be the domestic beneficiaries, as will well managed companies domiciled in other parts of the world. So stop worrying about weak domestic economic growth and start focusing on the opportunities that abound around the globe and the companies which will benefit.

There's more to investing than the S&P 500!

The media regularly quotes the S&P 500 (SPX) Capitalization Weighted Index. This index has seen two of the biggest hits in its history during the last decade, and is down 23.44% for the decade, but there are many areas of the market which are up for the decade. Take those same 500 stocks, equal weight them and they are up 47.53%. What about Small Cap stocks? The iShares S&P SmallCap 600 Index (IJR) is up 76% since December 31, 1999. Similarly, the Vanguard Emerging Markets ETF (VWO) is up 112.62% and the GreenHaven Continuous Commodity Index (GCC) is up 102.29%.

I have been providing this type of guidance; implementing a proactive and disciplined investment plan for clients since 1983.

US or international?

The natural tendency for investors in the US is to overweight US holdings. However, at times - like now, international equities are favored over the US because the asset class as a whole is performing well relative to US asset classes, as a whole.

Two popular and widely used ETFs are EFA (Europe, Far East & Asia) and EEM (Emerging Markets). The two largest holdings represented in the EFA are Japan and the United Kingdom, with a 22% and 21% weighting respectively. By contrast, the EEM's two largest country weightings are China and Brazil at 18% and 16% respectively. The relative strength relationship between EFA and EEM continues to favor EEM, telling me that emerging markets continue to outperform developed markets. However, by taking this analysis one step further, FRN (Frontier Markets) is exhibiting better strength than EEM. FRN’s largest country weighting is Chile at 31%.

It is this type of analysis which helps me to determine where to invest your funds. As I peel back the layers of the proverbial onion; international over US, emerging over developed, frontier over emerging…I am able to peer deeper into the international space and I can provide further analysis into where actual strengths may reside.

The trials and tribulations of the developed markets have been front & center in the news lately, suggesting a more defensive posture with respect to the developed and US equity markets at this time. On the other hand, we continue to see positive developments in the International equity space and superior strength still present in the Frontier and Emerging Markets.