You’re standing at the front of the line as the previous riders come gliding back into the boarding station. You saw them depart a few minutes earlier, a look of calm hiding their anxiety. And now you see them return, wild-eyed, frightened and relieved to have the ride behind them. Some of them vow to never ride that roller coaster again, and some can’t wait to get in line to get back on.
As wild as 2011 was, it is hard to believe that the U.S. stock market finished the year almost exactly where it started… just like a roller coaster. Many investors have vowed to never ride that roller coaster again… and some just can’t get enough of it. The S&P 500 began the year at 1257 and ended the year at 1257, and it paid you a little over 2% in dividends along the way. What’s the problem? Sounds pretty boring to me.
During the year the markets, as you know, were anything but boring. In 2011:
- The AVERAGE daily gain or loss was over 1%.
- Of the 252 trading days, the market was up/down in excess of 1% 95 times.
- On August 9th the market GAINED 4.74%.
- The NEXT DAY the market LOST 6.66%… ending the previous day’s party quickly and rudely.
- There were 14 days the market experienced gains in excess of 2%.
- There were 21 days the market experienced losses in excess of 2%.
And then, on the last day of the year, the market calmly brought you right back into the boarding station as if nothing had ever happened. Those in line waiting to get on for the next ride are looking closely at you… looking at your eyes and checking to see if you are happy or sad, excited or frightened… to get some sort of a clue as to what they might expect. And that is where the similarities end, because you have absolutely no clue what 2012 will bring… although most of you probably expect another roller coaster. As do we.
I didn’t even mention the foreign markets which got blistered. The EAFE Index (Europe, Australia and the Far East) declined 11.7% and the MSCI Emerging Markets Index declined 18.4%. OUCH! Their roller coasters did not return to their original boarding station.
The geopolitical and financial conditions which contributed to the roller coaster stock market are as prominent as ever.
- Europe’s financial crisis has not been solved… and it won’t be “solved” in 2012. They spent more than they earned. They borrowed and borrowed and now they have to cut back. It’s painful and it takes time. It also takes resolve and teamwork. Tim Tebow couldn’t pull this one out. The ECB may bail out the European banks but they won’t bail out the countries.
- China is slowing down. The one growth engine the rest of the world could count on is experiencing its own real estate bubble.
- The Middle East is… well, it’s the Middle East. Hasn’t the Middle East been a problem for over 2,000 years? New governments in Tunisia, Egypt and Libya may fall under the heading “be careful what you wish for, you might get it.” The masses have done without for so many years, they will likely not want to wait for a healthy economy… an economy with jobs… to start getting their “fair share.” They will want it now.
Domestically, there have been an abundance of signs of growth lately… just in time for the election year.
- Unemployment keeps slowly ticking down… now 8.5%.
- Jobless claims have been steadily ticking down and hit the lowest number since April, 2008.
- Industrial production is up.
- Construction spending is up (primarily due to nice weather conditions).
- Consumer sentiment is up.
- Housing starts hit a 19 month high (mostly multi-family units).
Even though the employment picture seems to be improving, most new jobs are not high-paying jobs, so personal disposable income has not increased at all. Two factors which have had a positive impact recently are:
- A significant drop in the price of gasoline at the pump.
- A drop in the personal savings rate.
Both contributed to a fourth quarter that makes it appear we may be turning this economy around. Don’t get too excited. Oil is back above $100 per barrel and gasoline prices will follow. And we can’t expect very many quarters with a drop in the savings rate while our economy continues to de-leverage.
My 40th high school reunion is next summer and somehow I am always involved in organizing these things. While digging through some boxes, I came across an alumni directory we created after our 20th reunion. A “hard copy” directory… almost sounds archaic, like it was dug up in some ruins (“Come look what I just found! It seems to be a book where they actually wrote down names and addresses of people they went to school with.”) In 1992, we didn’t realize that a hard copy directory would be unnecessary someday. Who knew the internet would be what it is today? Our class of 1972 now has a website which contains all the directory information and a lot more.
I mention this because we had made some interesting notes in our directory.
- Five men were arrested for breaking into the Democratic National Committee Office in the Watergate Hotel in 1972. More importantly, 1972 marked the first year in history that the word “gate” was tacked onto the name of a scandal. It would then be used for the next 39 years virtually every ridiculous time it was remotely possible to use it.
- The World Trade Center, which was destroyed in 2001, was built throughout 1972 and completed in 1973.
- Mark Spitz won 7 Olympic Gold Medals and Jack Nicklaus won the Masters.
- Best movie: The Godfather
- Best TV show: All in the Family (cutting edge in 1972)
- Rich Boyer graduated from high school (that wasn’t a note in the book. I just added it.)
Most interesting from an economic standpoint:
- Average price of a 3-bedroom home: $27,000
- Average household income: $11,489
- Average price of a new automobile: $ 3,853
- Average price of a gallon of gasoline: $ .36 (I could fill up my 1965 Mustang convertible for less than $5.)
I don’t think the term “average price of a 3-bedroom home” has much validity anymore… not since home prices in California, Las Vegas, Phoenix and most of Florida exploded upward a decade ago and then began their violent retracement downward four years ago.
Come to think of it, the average household income is probably also skewed by the “top 1% corporate jet owners,” who have become wealthier and wealthier as everyone else has become poorer.
And since 1972, many states have assessed all sorts of taxes on gasoline such that the “average” price of a gallon of gasoline is difficult to determine. In 1972, we were not too concerned with our carbon footprint, so gasoline was still in its primitive form. Heck, we were just discovering seat belts in 1972, so global warming was not on our radar. (Actually we already had seatbelts but we were just discovering that if you actually USED them, you might survive a car crash.) If we assume that the $3.13 per gallon I paid 3 days ago is the average price of gasoline today, that means the price of gasoline has increased 5.62% per year.
I absolutely love shows about greed and corruption. I can’t help myself. If I have a dark side or a weakness, it is that I become riveted when 60 Minutes runs an episode about fraudulent sub-prime mortgages. I live for the TV show American Greed, which airs on CNBC (it’s nice when you get to see some “non-fiction” programming on CNBC). Give me a Bernie Madoff documentary and a box of Bunch-A-Crunch and I am a happy man. I watched the movies Inside Job and Margin Call on a flight to San Francisco last month and I wanted the pilot to circle San Francisco so I wouldn’t have to turn them off. This stuff is too good.
(Inside Job is recommended viewing. A documentary narrated by Matt Damon, it does a good job of explaining what happened in 2008 with very little of the typical Hollywood hyperbole which tends to pervade movies about greedy bankers. It also does a VERY good job of explaining terminology in clear English. Margin Call was a 50-minute movie jammed into 107 minutes… in other words, I don’t recommend it. It is a fictional account of an investment banking firm that realized one day it was on the precipice of bankruptcy [sounds redundant]. The firm looks so suspiciously like Lehman Brothers that the CEO in the movie is named John Tuld… the name of the Lehman Brothers CEO was Richard Fuld. This movie doesn’t explain terminology very well at all… not even the term “Margin Call.” You think they would have at least explained the title of the movie.)
It’s not that I admire the crooks or that I have no sympathy for the victims (except for victims who thought they were getting a guaranteed 10% return with no risk… and lost “my entire life savings.”). It’s just that I am fascinated, mesmerized and spellbound by the lengths to which criminals go to perpetrate their scams and the gullibility exhibited by many of the victims as they follow each other over a cliff.
The show on CNBC is not called African Greed or Australian Greed. It’s called AMERICAN GREED! No other country seems to have perfected the art of high stakes financial corruption quite like the United States of American Greed. Stacy Keach is perfect as the narrator of American Greed and each episode walks you through one scam after another, usually ending with the terms of imprisonment for that episode’s criminal.
Speaking of prison terms, Mr. Madoff is serving a 150-year prison term. (I didn’t go to law school so I don’t get it. Is a 150 year prison term different from a life sentence? He’s 73 years old. Are they saying that, if somehow he manages to live to be 223 years old, he’s a free man? Or if he lives to be 173, he’s eligible for parole? Do judges get together later and laugh about this over a round of drinks?)
I’m still waiting for some of the people responsible for the global meltdown of 2008 to be featured on American Greed… with a bunch of big, long prison sentences at the end. But many people who had an instrumental role in the global meltdown of 2008 are NOT serving time. They haven’t even been convicted… or tried… or indicted… or accused… or even stalked by paparazzi.
As I’ve said before, Occupy Wall Street needs to become Occupy Washington. See my November Commentary ¡Toma La Calle!
Positive economic signs notwithstanding, we at Boyer & Corporon Wealth Management are not excited about 2012. We are not expecting a disaster like 2008, but we don’t see a robust economy in the offing. Higher gasoline prices, continued de-leveraging and (eventually) bad weather will likely weigh heavily on the first several months of the year. We hope we are wrong. The best investment asset class this past year was municipal bonds and we continue to feel munis offer good relative value… although not NEARLY as much value as a year ago. Interest rates will remain low. Although there is not a lot of money to be made owning Treasury Bonds, 2012 will likely not be the year to lose money in Treasury Bonds either.
Maybe more noise for Not Very Much.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.