Brighton Perspective

The S&P 500 has been range bound for almost six months, trading between 1,050 and 1,150 since early September. We have been and remain concerned about a correction. Now, earnings growth for 2010 is forecast at roughly 13.5% over 2009. If the S&P remains around 1,100 through year-end and earnings come in in-line, we may... have a non-correction correction. However, we remain defensive given very uncertain economic data.

FOXNews.com - New Jobless Claims Jumped to 496,000 as Heavy Snow Caused Rise in Layoffs

FOXNews.com - New Jobless Claims Jumped to 496,000 as Heavy Snow Caused Rise in Layoffs.

Why is only the bad news "unexpected"? Anyone following the economy closely would not really consider a rise in new jobless claims unexpected. The economy has been limping for awhile without job growth and will continue to do so for the foreseeable future. As I have written before, labor is often the largest single expense for a business. When the top line isn't growing and owners can't comfortably forecast the near term, they shift to managing the cost structure tightly. That means layoffs. Not really surprising. Unfortunately, it's unlikely to change in the near term as we still don't know what the cost impact will be of such things as health-care reform.

Don't be surprised the "unexpected" headlines. A healthy skepticism is a valuable asset as an investor - you may give up some upside by not going "all-in" but the downside insurance will be worthwhile.

Economists vs Analysts

Consensus 3% GDP growth is inconsistent with consensus 30% earnings growth. True or False.

Depends on perspective. I've looked at the last 20 years of S&P 500 earnings (gathered from the S&P website) and GDP growth info from the Economics and Statistics Administration. I don't see a defined correlation. That is earnings can grow more than 30% in a low growth economic environment. That doesn't mean it will happen.

The fallacy in this Morningstar post is that because investment analysts expect 30% earnings growth and 1Q results were good (until you parse out financials) that economists forecasting GDP must be wrong and therefore will have to revise their forecasts up. I disagree - I think it's more likely that economists are spot-on and analysts are incorrect and will be reducing earnings growth expectations as the year wears on.

Where does substantial growth come from with tight credit, nominal CAPEX spending and high unemployment?

Weekly Update

The Markets                            Economic news was mostly positive for the week and that helped spur the equity markets to another strong week. Domestic markets are now close to break-even on the year after falling more than 5% from peaks around January 19th. The Fed also raised the discount rate charged to banks for emergency loans suggesting it sees an improving landscape as well. Consumer confidence was higher in the latest survey, industrial production stayed strong, new construction rose and inflation remained contained. All in all, a better week for news and market performance than we’ve seen recently.   Market/Index 2009 Close Prior Week As of 02/19/10 Week Change YTD Change DJIA 10428.05 10099.14 10402.35 3.00% (0.25)% S&P 500 1115.10 1075.51 1109.17 3.13% (0.53)% MSCI World 1168.47 1107.42 1134.45 2.45% (2.91)% Russell 2000 625.39 610.72 631.62 3.42% (0.28)% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 3.84% 3.69 3.78 9 bps (6) bps Last Week's Headlines ·         Housing starts came in at 591,000 for January which was better than expected. ·         Building permits came in at 621,000 for January which was better than expected. ·         Industrial production rose .9% for January which was better than expected. ·         Capacity utilization came in at 72.6% which met expectations and was an improvement from December. ·         Core CPI for January came in at (0.1)% which was lower than expected – in fact, the first decline since 1982.   Upcoming Items of Interest ·         Light schedule for this week – we get the Case-Shiller real estate index on Tuesday along with the February consumer confidence index update. On Wednesday, we get January new home sales. On Thursday, initial and continuing claims and January durable orders. On Friday, we get the 2nd Q4 GDP revision, the February PMI report, the final February U of Michigan consumer sentiment report and January existing home sales.      Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Headlines and upcoming items of interest are pulled from published reports of Vanguard, Briefing.com and Reuters. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

Inflation

Core CPI declined for the first time since 1982. Sounds good - prices are falling during a period of high unemployment so that helps people stretch what income they have during tough times. However, it strips out energy costs, which are critical to anyone living in a building. Further, the calculation doesn't fully reflect how today's consumers spend money.

Many people will suggest we're heading for a deflationary environment and that inflation is no longer a concern. I continue to focus on the risk of inflation developing toward the middle to end of 2011 and believe it is a greater concern than deflation.

Consumer asset allocation

According to a study referenced by Dave Rosenberg, U.S. Consumers have their assets allocated accordingly:

34% Real Estate

34% Equity

16% Cash

9% personal property (durable goods)

8% Corporate/Muni fixed income

1% Treasuries

This represents roughly $53 Trillion in assets. Not much yield, huh! Liquidity is also a potential issue. Many investors consider 16% cash to be money on the sidelines waiting to be invested but I've noted before that several studies have shown that that money never does come off the sidelines. Instead, investors will alter their "investable" allocations. This allocation looks ripe for risk reduction and an improvement in yield. Rosenberg believes that suggests high quality fixed income. Makes sense.

Weekly Update

The Markets                            We finally had a modest reversal for the week across the equity indexes. News from the European Union regarding its willingness to provide support to Greece and generally positive (albeit weak) news regarding the U.S. economy helped quell investors concerns for week. Retail sales edged up and business inventories fell slightly for the week suggesting the economy was continuing to expand. The trade deficit increased more than expected but was taken by many as a positive sign because the most significant contributor was an increase in petroleum imports. This was seen as a sign that businesses may be gearing up production.     Market/Index 2009 Close Prior Week As of 02/12/10 Week Change YTD Change DJIA 10428.05 10012.23 10099.14 0.87% (3.15)% S&P 500 1115.10 1066.19 1075.51 0.87% (3.55)% MSCI World 1168.47 1095.48 1107.42 1.35% (5.22)% Russell 2000 625.39 592.98 610.72 0.87% (3.58)% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 3.84% 3.59 3.69 10 bps (15) bps Last Week's Headlines ·         Trade Balanced decreased to a deficit of just over $40 billion which was greater than expected. ·         Initial jobless claims came in at 440,000 which was below expectations. ·         Retail sales increased 0.5% which was slightly better than expectations. ·         Business inventories declined 0.2% which was better than expected.   Upcoming Items of Interest ·         While a short week with the President’s Day holiday on Monday, it will be busy. We get building permits and housing starts on Wednesday as well as capacity utilization and industrial production and FOMC meeting minutes. On Thursday we get January PPI and leading indicators and on Friday we get January CPI readings. Economists are expecting modest increases across the board.    Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Headlines and upcoming items of interest are pulled from published reports of Vanguard, Briefing.com and Reuters. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

Jobless Suffer as Corporate Cash Hits $1.18 Trillion (Update1) - Bloomberg.com

Jobless Suffer as Corporate Cash Hits $1.18 Trillion (Update1) - Bloomberg.com.

This is a key to sustained economic growth. Consumer spending is flat over the last 12 months (though debt has been significantly reduced) while government spending has dramatically increased (which is not wealth creating). Corporations, however, have dramatically cut back on spending and are holding substantial amounts of cash. Why?

Regulatory and tax uncertainty has created a need for companies to manage costs and hold cash. Regulatory items such as universal health care and cap and trade policies can be expected to substantially increase costs and taxes as the government needs funding sources for these programs. Until we get clarity on these issues companies will not spend and will not hire. It would not be surprising if equity prices adjust to reflect this reality (if they aren't already doing so).

EU Reaches Deal on Greece Help - WSJ.com

EU Reaches Deal on Greece Help - WSJ.com.

For all of the initial posturing, this was necessary. If the EU had refused to assist Greece, it would have permanently damaged the credibility of the EU and significantly weakened the value of the Euro. It also shows the lengths to which the global governments will go to avoid a sovereign default.

Correction?

The recent market downturn is cause to wonder if we're in the early stages of a market correction. As we entered the year, investors were looking for 26% earnings growth from S&P 500 constituents while economists were looking for 3% GDP growth (consensus). Per Dave Rosenberg, at Gluskin-Sheff, 65% of the companies have reported and, ex Financials, earnings growth has been 16% while gross revenue growth has been 2%. These results should cause investors to rethink their 2010 earnings expectations and price equities accordingly.

Weekly Update

The Markets                            The down draft continued for the first week of February as investors continued to parse the economic data for true signs of recovery. Personal income and spending increased slightly in December which was a positive but the growth was not enough to dispel concerns about the consumer contribution to the recovery. In fact, consumer credit fell again further suggesting that consumers will not be contributing significantly to the recovery any time soon. Finally, unemployment dropped below 10% in the latest report, but investors noted the significant increase in discouraged workers underlying the drop.   Market/Index 2009 Close Prior Week As of 02/06/10 Week Change YTD Change DJIA 10428.05 10067.33 10012.23 (0.55)% (3.99)% S&P 500 1115.10 1073.87 1066.19 (0.72)% (4.39)% MSCI World 1168.47 1119.64 1095.48 (2.15)% (6.25)% Russell 2000 625.39 602.04 592.98 (1.50)% (6.38)% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 3.84% 3.61 3.59 (2) bps (25) bps Last Week's Headlines ·         Personal income and spending increased in December. Personal income was slightly above expectations while spending was slightly below expectations. ·         Construction spending declined more than expected. ·         Initial jobless claims increased more than expected. ·         Unemployment declined to 9.7% which was better than expected but the number of discouraged workers (not counted as unemployed) surged.   Upcoming Items of Interest ·         The coming week brings an update on Wholesale inventories (Tuesday), January Treasury budget (Thursday), January retail sales (Thursday), Business inventories (Friday) and the Michigan consumer sentiment index (Friday). Of course, we’ll have the on-going issues with Greece and the potential impact of a default or bail-out on the European Union and the Euro.    Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Headlines and upcoming items of interest are pulled from published reports of Vanguard, Briefing.com and Reuters. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

Stocks, Metals Plunge as Dollar Gains on Debt, Jobs Concerns - Bloomberg.com

Stocks, Metals Plunge as Dollar Gains on Debt, Jobs Concerns - Bloomberg.com.

It's startling to me to see the media continue to use the word "unexpected" related to any bad economic news, particularly jobs. As we've said before, Corporate America faces substantial uncertainties regarding potential cost increases related to greater regulation and taxation. Given the inability to gain clarity regarding these issues, Corporate America continues to focus on cost containment. The largest component of the cost structure is labor. Hence, Corporate America is intensely focused on managing labor costs. That can translate into layoffs or to hiring freezes. Neither is good for consumers and neither should be "unexpected". Until the government clarifies its intent with regard to taxes and regulation, Corporate America will be hesitant to spend.

We've anticipated a market correction of 15-20% at some point during 2010. We assumed it would be driven by investors resetting expectations to reflect lower GDP growth and the resulting negative impact on corporate earnings growth. It appears it may be happening a little earlier than expected, but it is not "unexpected".

Special Announcement!

Brighton Financial Planning, Inc.

Announces Its Acquisition by

John P. Middleton, CFA, CAIA

 

Clinton, NJ - February 2, 2010  - John P. Middleton and James J. Chesterton are proud to announce that John has acquired the outstanding stock of Brighton Financial Planning, Inc. effective 12/31/2009. We believe the acquisition by John will ensure the legacy of sound financial planning and prudent investment management established by Jim over the past 25 years. Jim, Nina, Sree and Lorraine will continue with Brighton to ensure a seamless transition of management responsibilities.

Brighton Financial Planning, Inc. will continue to provide prudent investment management, financial and estate planning, investment advisory services and comprehensive portfolio analysis and reporting. We look forward to another 25 years of continued outstanding service to our clients!

 

 

About Brighton Financial Planning, Inc.

 

Brighton Financial Planning, Inc. was established in 1984 by James J. Chesterton, Jr. and is a SEC Registered Investment Advisor. The firm is a fee-only advisory form and provides financial and estate planning, investment management, investment advisory and comprehensive portfolio analysis and reporting services. The firm is located at 1728 Rt. 31, Clinton, NJ 08809. The phone number is 908-730-7000.

About John P. Middleton, CFA, CAIA

John joined Brighton Financial Planning, Inc. in August 2008. John has more than 20 years experience covering institutional and individual financial services. John graduated from Rutgers University and from the University of Tampa, where he earned an M.B.A in Finance in 1993. John is a Chartered Financial Analyst (CFA), a Chartered Alternative Investment Analyst (CAIA) and is a member of the CFA Institute, the New York Society of Security Analysts, and the CAIA Association.

Weekly Update

The Markets                            Financial markets were down again for the week closing January down uniformly. While the vast majority of companies met or exceeded earnings estimates for the fourth quarter and full year 2009, many did so without demonstrating meaningful top line revenue growth. At one point, aggregate gross revenue growth, x financials, was 0%, even as net earnings growth was in low double digits. Investors appear to be shifting from emphasizing reported earnings growth to top line growth as evidence of true economic recovery. GDP reported on Friday was superficially positive at 5.7% but upon further review demonstrated that most of the growth was via inventory reduction and not from much needed corporate and consumer spending. Fasten your seatbelts!   Market/Index 2009 Close Prior Week As of 01/29/10 Week Change YTD Change DJIA 10428.05 10172.98 10067.33 (1.04)% (3.46)% S&P 500 1115.10 1091.76 1073.87 (1.64)% (3.70)% MSCI World 1168.47 1149.89 1119.64 (2.64)% (4.19)% Russell 2000 625.39 617.12 602.04 (2.44)% (4.95)% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 3.84% 3.62 3.61 (1) bps (23) bps Last Week's Headlines ·         On Wednesday, the FOMC stated it would continue to maintain the Fed Funds rate at 0.25% for an “extended period”. ·         GDP grew at 5.7% annualized for the fourth quarter of 2009. ·         Durable-goods order increased (positive) but less than expected (negative). ·         Both existing and new home sales declined for December – both declines were unexpected. ·         Consumer confidence increased slightly to its highest level since September 2008.   Upcoming Items of Interest ·         Personal Income, construction spending and manufacturing activity all reported on Monday, the ISM non-manufacturing report on Wednesday, productivity and factory orders on Thursday and employment and consumer credit on Friday. We’ll also hear from the White House regarding the 2011 Federal budget. Expect continued coverage of the financial crisis in Greece and its effect on the European Union.    Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Headlines and upcoming items of interest are pulled from published reports of Vanguard, Briefing.com and Reuters. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.