Good afternoon to you all. Please find enclosed two reports
released by the US Commerce Department and the US Federal Reserve. We
believe they are important due to the fact they stand in stark contrast
to the performance of US equity markets over the last two months.
US COMMERCE DEPARTMENT
The overall US quarterly trade deficit ballooned to $US61.3 Billion for
the July-September quarter, representing an 8.1% increase over the last
quarter. This is a fourth consecutive record deficit and provides strong
evidence that Asian weakness continues to batter the US economy. The
results were also worse than had been expected. At this pace, the
deficit is on track to hit $220 Billion, which far surpasses 1997's $155
Billion and the previous record of $168 Billion, which was recorded back
in 1987.
Despite the fact US equity markets continue to hover over 9,000 and
recently set a new record-high, US exports continue to plunge as layoffs
continue in the manufacturing sector and farmers are facing the worst
economic conditions in over a decade.
OUR COMMENTS
Much of this can be attributed to the fact consumer spending continues to
lead the domestic economy forward, which has translated into growth in
the overall US economy. However, in accomplishing such a feat, US
consumers are setting records for personal debt and lack of savings.
Given the fact such a pattern can not continue indefinitely, US consumers
will inevitably be forced into one of two options:
1] Decrease spending in order to service debt and/or replenish savings;
or
2] Sell stock assets in order to service debt and/or replenish savings
Either option will inevitably lead to lower stock market values, it is
just a question of when. Though nobody can predict such matters, we
continue to believe that extreme conditions are always dangerous and
prone to bursting at any time. Given the current bleak state of affairs
in commodities, US trade deficits and the global economy in general,
which stand in stark contrast to the exuberant
US equity market and domestic economy, there is no doubting we are in an
environment of extremes.
US FEDERAL RESERVE
The US Federal Reserve reported that economic growth has slowed in 5 of
it's 12 regions, while strengthening in only 1 region. Consumer
spending, the engine currently driving the US economy, was up but sales
were weaker than expected. Specifically, despite cuts in interest rates,
the results of retail sales reports were mixed, though home building and
mortgage refinancing activity has increased.
OUR COMMENTS
The fact of the matter is that US manufacturing is under increasing
pressure from weak exports and cheap priced imports. This had led to a
loss of price controls, now being dictated by the cheap imports, and much
smaller profits margins. In turn, this has forced several big names to
announce layoffs, freeze wages and warn of lower earnings in the upcoming
fourth quarter. Big names which have already announced 4th quarter
earning warnings include Boeing, Sears, Kellogg's and Cabletron.
If we try to look at the positive signs, US unemployment remains strong
as does US consumer spending. However, the fact of the matter is that US
consumer spending AND ONLY consumer spending is driving demand, which is
leading to continued strong employment. Strong employment that, we might
add, is coming with non-existent wage increases. We repeat our concern
that such conditions can not last very much longer. US consumers are
racking up all-time high personal debt, while simultaneously driving
savings down to all-time lows.
Many will make the argument that increasing wealth due to stock market
gains, the "wealth effect" can more than offset these problems. In the
short term, we agree. However, debt ultimately catches up to anyone and
the day of balancing the books will come and the stock market will have
to pay the price for it.
In the meantime, US consumers are still in control of their fate. The
opportunity exists to take some profits and restore balance between
spending/saving. Unfortunately, greed usually leads common sense, at
least until walls begin to collapse and the collective "smack" of
slapping foreheads can be heard around the world. Until them, US
consumers must hope the stock market does not fall onto hard times.
Otherwise, they will be stuck with high debt, no savings and depleted
stock portfolios. Then, the real trouble will begin.
Are we wrong? Possibly. We are willing to concede that. However, we
will not concede that we have at least a 50-50 chance of being right. In
our books, those odds are not good enough to bet our financial security.
Our portfolio will continue to make acquisitions in which the odds are
heavily balanced in our favour but blindly parking our money in equity
markets is out of the question at this time.
Have a great day.
Regards,
Agora
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