I filled my gas tank last night: $55.30. A new record for my Toyota Solera. Last month, it took just under $50 if my tank was near empty. I know you are probably thinking, why do I wait until my tank is almost empty to fill it? Well, it’s a winter thing. I hate getting out of the car to pump gas in the cold so I just keep driving until I have no choice. I don’t drive very far very often so I only have to fill my tank a couple times each month.

If it is going to cost me an extra $5+ dollars per tank, that’s a little over $10 per month. The extra $10+ dollars every month is not a significant hardship to me and an additional $10 may not be a problem for you either. Hardship or not, it is still $10+ that is NOT going to be spent anywhere else in the economy. It will NOT buy food at the grocery store, a meal at a restaurant or clothes at a department store. It is just like an additional tax with one gigantic drawback…none of this tax goes to reduce government debt.

The International Energy Agency stated that, if oil averages $100 per barrel this year, the U.S. will have to spend $80 billion MORE than it spent last year on oil. That’s $80 billion that would not be spent anywhere else in the economy.

If you recall, the Obama Administration agreed with the House Republican majority to extend the Bush tax cuts two more years. The reasoning was that a tax increase during a fragile economic recovery would endanger the recovery…that we might sink right back into another recession.

By the way, this recovery, which officially began in the summer of 2009, is still limping along with around 9% unemployment…unheard of this long after a recession has “ended.”

If an increase in fuel prices has the ultimate identical effect as a tax increase, we may not be referring to this economic recovery as an anemic recovery. We may be referring to it as another recession.

The stock market doesn’t seem to feel this is a problem. The S&P 500 advanced 3.43% in February and 22.5% since last February. (However, if you have had all your money in the S&P 500 since the end of the ’ 90s, you now have a whopping annual return of .92%.)

The stock market has shrugged off high unemployment, declining housing prices, skyrocketing commodity prices, burgeoning U.S. government debt, ousted governments in Africa and the Middle East, soon to be ousted government in Africa and the Middle East, and the fact that the NFL might have a lockout.

There’s no mistaking that economic indicators have improved somewhat.

• First time jobless claims have declined.
• Home foreclosures, although still high, are slowing.
• GDP growth, although not robust, is consistently positive.
• Corporate profits are up and corporations’ balance sheets are much healthier.
• Unemployment, although abnormally high almost two years after the end of a recession, is slowly declining.

What concerns us is that these meager economic improvements are disappointing given the amount of fiscal and monetary steroids with which our economy has been injected. QE2 (Quantitative Easing 2), the Fed’s plan to stimulate the economy has just about run its course and it appears there will not likely be a QE3. The stock market, which has enjoyed a 2-year rally since it hit a panic sell-off bottom on March 9th, 2009, may run into some economic surprises, both here and abroad.

We haven’t heard much out of Europe lately but the problems in Greece, Ireland, Spain, Portugal and Italy haven’t evaporated. They’re just not on the front page anymore thanks to Africa and the Middle East. Look for Europe to re-assert itself back to the top of the economic headlines soon. Greek bonds are trading at an interest rate above 10% so SOMEONE seems to feel there is still a problem.

By the way, speaking of Africa and the Middle East, Facebook and Twitter did NOT cause revolutions in Tunisia and Egypt. However, without the new social media outlets, the revolutions might not have been as successful. Facebook and Twitter “revolutionized” the revolutionary experience…but they did not cause them. What caused governments in Tunisia and Egypt (soon Libya) to be toppled was the same thing that causes most revolutions…oppressive governments and unusually unhappy but organized citizens.

Facebook and Twitter helped them be more organized but the unhappiness? That came from 30 – 40 year dictatorships, skyrocketing food prices and 20%+ unemployment among the most youthful citizens. When 20+% of men between the ages of 17 and 30 are unemployed in ANY country (including the USA), you are going to have problems. Young men with nothing to do makes for an unhealthy environment.

It was four years ago that I noticed a small news item in the Wall Street Journal that disturbed me. It was a small article buried somewhere on the inside pages. The article said that a credit card company (I think it was Capital One but I’m not sure) did a survey of their credit card holders…not a phone survey but one where they checked credit reports or something. In this survey, they discovered that, of all the people who were at least 60 days delinquent on their mortgage payment, 70% were current on their credit card payment.

The obvious question is…why (and how) would you make your credit card payment when you can’t make your house payment? It would seem that the house payment is the first and most important bill to pay. I thought about it a long, long time. The only conclusion I could come to is that people were becoming so strapped for cash that they were using their credit cards to live…buying groceries, filling up their car with gasoline, paying utilities, etc. If you reach the point where you have to choose between making your house payment and buying food for your family…well, that’s a pretty easy decision. It takes a long time to get evicted but that credit card has to work TOMORROW!

It seemed evident to me that a financial system operating in that fashion was eventually going to hit the wall. So in the spring of 2007, we began reducing our equity positions for our clients. That appeared to be the wrong thing to do because the stock market kept climbing higher. In the summer of 2007, problem mortgages were beginning to make rumbling noises. The Fed assured us that everything would be OK but we pared back our equity positions a little bit more. I began to question my sanity at times as the stock market kept climbing higher. There seemed to be obvious systemic problems in our economy but the stock market didn’t seem to care…until October when the stock market hit an all-time high.

You know what happened after that. From October 9th until March 9th of 2009, the S&P 500 Index lost over 43%. Sometimes we can be fooled into thinking that, because the stock market is rallying, the economy must be good. Sometimes we make the mistake of thinking that, just because the economy is “better” that maybe the economy is doing great. Below is a chart that I have included in previous Investment Commentaries. It shows the number of new monthly foreclosure filings in the U.S.

It is clearly an economic indicator that is improving. There were only 225,000 new foreclosure filings in February which is MUCH better than 2009 and most of 2010. However, it is still 225,000, almost quadruple the monthly total in most of 2005.

The massive amount of consumer leverage accumulated over the previous 20 years does not disappear quickly or easily. The problems associated with that leverage have not disappeared quickly either. At Boyer & Corporon Wealth Management, we continue to be aware of the potential risks of investments, not just the potential returns.

We continue to find the municipal bond market a very intriguing investment opportunity. It’s not without its “land mines” and we are working diligently to make sure we don’t step on one of them but some municipal bonds have been “trashed” by investors so badly, we are seeing bonds issued by decent municipalities selling at prices that imply annual tax-free rates of return of as much as 7%. The majority of them are General Obligation bonds that have the taxing authority of the municipality. Call us crazy but we think the fears of default are way overblown. And we suspect this is a window of investment opportunity that may not stay open very long.

~Richard W. Boyer, CFP, CFA
Chief Investment Officer

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.

I filled my gas tank last night: $55.30. A new record for my Toyota Solera. Last month, it took just under $50 if my tank was near empty. I know you are probably thinking, why do I wait until my tank is almost empty to fill it? Well, it’s a winter thing. I hate getting out of the car to pump gas in the cold so I just keep driving until I have no choice. I don’t drive very far very often so I only have to fill my tank a couple times each month.

If it is going to cost me an extra $5+ dollars per tank, that’s a little over $10 per month. The extra $10+ dollars every month is not a significant hardship to me and an additional $10 may not be a problem for you either. Hardship or not, it is still $10+ that is NOT going to be spent anywhere else in the economy. It will NOT buy food at the grocery store, a meal at a restaurant or clothes at a department store. It is just like an additional tax with one gigantic drawback…none of this tax goes to reduce government debt.

The International Energy Agency stated that, if oil averages $100 per barrel this year, the U.S. will have to spend $80 billion MORE than it spent last year on oil. That’s $80 billion that would not be spent anywhere else in the economy.

If you recall, the Obama Administration agreed with the House Republican majority to extend the Bush tax cuts two more years. The reasoning was that a tax increase during a fragile economic recovery would endanger the recovery…that we might sink right back into another recession.

By the way, this recovery, which officially began in the summer of 2009, is still limping along with around 9% unemployment…unheard of this long after a recession has “ended.”

If an increase in fuel prices has the ultimate identical effect as a tax increase, we may not be referring to this economic recovery as an anemic recovery. We may be referring to it as another recession.

The stock market doesn’t seem to feel this is a problem. The S&P 500 advanced 3.43% in February and 22.5% since last February. (However, if you have had all your money in the S&P 500 since the end of the ’ 90s, you now have a whopping annual return of .92%.)

The stock market has shrugged off high unemployment, declining housing prices, skyrocketing commodity prices, burgeoning U.S. government debt, ousted governments in Africa and the Middle East, soon to be ousted government in Africa and the Middle East, and the fact that the NFL might have a lockout.

There’s no mistaking that economic indicators have improved somewhat.

• First time jobless claims have declined.
• Home foreclosures, although still high, are slowing.
• GDP growth, although not robust, is consistently positive.
• Corporate profits are up and corporations’ balance sheets are much healthier.
• Unemployment, although abnormally high almost two years after the end of a recession, is slowly declining.

What concerns us is that these meager economic improvements are disappointing given the amount of fiscal and monetary steroids with which our economy has been injected. QE2 (Quantitative Easing 2), the Fed’s plan to stimulate the economy has just about run its course and it appears there will not likely be a QE3. The stock market, which has enjoyed a 2-year rally since it hit a panic sell-off bottom on March 9th, 2009, may run into some economic surprises, both here and abroad.

We haven’t heard much out of Europe lately but the problems in Greece, Ireland, Spain, Portugal and Italy haven’t evaporated. They’re just not on the front page anymore thanks to Africa and the Middle East. Look for Europe to re-assert itself back to the top of the economic headlines soon. Greek bonds are trading at an interest rate above 10% so SOMEONE seems to feel there is still a problem.

By the way, speaking of Africa and the Middle East, Facebook and Twitter did NOT cause revolutions in Tunisia and Egypt. However, without the new social media outlets, the revolutions might not have been as successful. Facebook and Twitter “revolutionized” the revolutionary experience…but they did not cause them. What caused governments in Tunisia and Egypt (soon Libya) to be toppled was the same thing that causes most revolutions…oppressive governments and unusually unhappy but organized citizens.

Facebook and Twitter helped them be more organized but the unhappiness? That came from 30 – 40 year dictatorships, skyrocketing food prices and 20%+ unemployment among the most youthful citizens. When 20+% of men between the ages of 17 and 30 are unemployed in ANY country (including the USA), you are going to have problems. Young men with nothing to do makes for an unhealthy environment.

It was four years ago that I noticed a small news item in the Wall Street Journal that disturbed me. It was a small article buried somewhere on the inside pages. The article said that a credit card company (I think it was Capital One but I’m not sure) did a survey of their credit card holders…not a phone survey but one where they checked credit reports or something. In this survey, they discovered that, of all the people who were at least 60 days delinquent on their mortgage payment, 70% were current on their credit card payment.

The obvious question is…why (and how) would you make your credit card payment when you can’t make your house payment? It would seem that the house payment is the first and most important bill to pay. I thought about it a long, long time. The only conclusion I could come to is that people were becoming so strapped for cash that they were using their credit cards to live…buying groceries, filling up their car with gasoline, paying utilities, etc. If you reach the point where you have to choose between making your house payment and buying food for your family…well, that’s a pretty easy decision. It takes a long time to get evicted but that credit card has to work TOMORROW!

It seemed evident to me that a financial system operating in that fashion was eventually going to hit the wall. So in the spring of 2007, we began reducing our equity positions for our clients. That appeared to be the wrong thing to do because the stock market kept climbing higher. In the summer of 2007, problem mortgages were beginning to make rumbling noises. The Fed assured us that everything would be OK but we pared back our equity positions a little bit more. I began to question my sanity at times as the stock market kept climbing higher. There seemed to be obvious systemic problems in our economy but the stock market didn’t seem to care…until October when the stock market hit an all-time high.

You know what happened after that. From October 9th until March 9th of 2009, the S&P 500 Index lost over 43%. Sometimes we can be fooled into thinking that, because the stock market is rallying, the economy must be good. Sometimes we make the mistake of thinking that, just because the economy is “better” that maybe the economy is doing great. Below is a chart that I have included in previous Investment Commentaries. It shows the number of new monthly foreclosure filings in the U.S.

It is clearly an economic indicator that is improving. There were only 225,000 new foreclosure filings in February which is MUCH better than 2009 and most of 2010. However, it is still 225,000, almost quadruple the monthly total in most of 2005.

The massive amount of consumer leverage accumulated over the previous 20 years does not disappear quickly or easily. The problems associated with that leverage have not disappeared quickly either. At Boyer & Corporon Wealth Management, we continue to be aware of the potential risks of investments, not just the potential returns.

We continue to find the municipal bond market a very intriguing investment opportunity. It’s not without its “land mines” and we are working diligently to make sure we don’t step on one of them but some municipal bonds have been “trashed” by investors so badly, we are seeing bonds issued by decent municipalities selling at prices that imply annual tax-free rates of return of as much as 7%. The majority of them are General Obligation bonds that have the taxing authority of the municipality. Call us crazy but we think the fears of default are way overblown. And we suspect this is a window of investment opportunity that may not stay open very long.

~Richard W. Boyer, CFP, CFA
Chief Investment Officer

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.