Tuesday, February 9, 2010

More Evidence of Sluggish Economy, and Investment Considerations

The National Federation of Independent Business reports little change in business among its members, generally small to mid-size companies, in its press release Small Businesses Remain Pessimistic Over Economy.

The NFIB members report deflationary business trends on prices, even as the ECRI reports that its future inflation gauge has risen steadily for nearly a year and its spokesmen predict imminent job growth in America.

The Bureau of Labor Statistics reports that in December, labor turnover was poor, in its latest Job Openings and Labor Turnover Summary (JOLTS).

Gallup's ongoing surveys (www.gallup.com) show that workers see no hiring at their firms and that their discretionary spending has not picked up.

Given these and other cross-currents, a 10-year Treasury borrowing rate of 3.6% seems fair. What is unfair is the Fed manipulating short rates to be zero.

In an investing world where a safe 5% yield does not exist, investors may have to be satisfied with the risk-reward of a stock such as Chubb (2.9% yield plus stock buyback), where on a multi-year basis, some stock appreciation in addition to the yield is quite reasonable given that the stock is historically cheap at around tangible book value, or McDonald's at a 3.5% yield despite slow growth and a large premium to book value.

My sense is that far too many investors have purchased perpetual bond funds, which have the potential to provide zero or negative returns year after year if rates rise or their asset quality declines. Direct ownership of bonds or ownership of a bond fund that terminates in a specific year are much safer alternatives.

So far as cash management goes, a search for the highest FDIC-insured yield makes sense. Why take almost nothing, or nothing, in a money market fund or a "safe" bank account when AmEx Bank pays 1.5% (last I looked)?

In this post-credit crisis environment, where it is official policy to inflate consumer prices, investing has rarely been so difficult. Everyone should invest in preparation for another economic downturn, though such does not appear to be likely for 2010 absent a bolt from the blue (due to so much ongoing depression and stimulus). This argues for quality up and down one's portfolio, especially now that 2009 was a banner year for the low-quality stuff.

The hot money that piled into commodities is piling out and may have more piling out to do. Nonetheless, what is going on in Greek finance is on track to happen in the U. S. Think of New York and California as much more important parts of the U. S. than Greece/Ireland/Portugal are in the euro-zone. Right now the USD is the proverbial one-eyed man in the land of the blind vs. the euro and yen. However, the structurally strongest countries are those with the fewest debt problems, which right now appear to be India and Brazil among the larger emerging economies. Perhaps Russia technically fits this category, but I assume that Russia is too corrupt to consider as an investment alternative.

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