May 17, 2011
The Price of Tea in China
The Investment View from Prescott, Arizona
I’ve been talking a lot lately about inflation, because it is creeping up and up.
The average person is facing higher food costs, soaring gasoline prices, and if you are paying for college education (like me) or medical costs you are really feeling it.
Making the problem worse is the fact that wages are not rising along with prices, putting workers in an inflationary squeeze as prices rise and incomes stagnate.
Inflation is taking money out of your pocket just as surely as any tax would. Inflation is making you poorer. Even though you might have the same number of dollars, you can’t buy what you used to as dollars become worth less and less.
And I expect it to get worse since inflation is now becoming China’s main export. Inflation in China has been over 5% this year, one and a half times higher than our 3.2% annual rate. If you can feel 3.2% inflation like I do, imagine the pinch the poor Chinese workers are feeling.
For us, this means anything imported from China, including all those doo-dads at Wal-Mart, will be going up in price even more as Chinese inflation trickles down into our economy.
Inflation also has the potential to create a lot of political unrest as food becomes harder to afford and breeds anger and fear in the population.
It is no coincidence that several Middle East and African dictators are now unemployed. They couldn’t keep the price of food from going up, the common people blamed them for it, and the revolution was on.
The leaders in China have got to be nervous because the last great uprising in China in the 1980s, including tanks in Tiananmen Square, was sparked by rising food prices. The last thing the ruling party wants is a few hundred million unhappy peasants marching on Peking.
It is very possible that rising inflation may affect politics in the U.S. as it becomes the poster child for a bungled fiscal policy, and the voters discover that the Emperor really has no clothes.
A Slice of Life
Southern Utah has to be one of the best kept secrets in the country with 5 National Parks as well as several National Monuments, Forests and Recreation Areas. It is one piece of spectacular beauty one right after another.
Just an hour west of Zion Park is beautiful St. George, Utah where the junior college National Championship Softball Tournament is being played this week. Yavapai College, where I taught for 20 years and my wife Cathleen teaches currently, has the #1 ranked team in the country. I’m thinking it might be fun to go and cheer them on.
Softball was my favorite pastime until a few years ago when I found I had too many parts falling off to keep it up. In local leagues as well as a team that traveled to tournaments all over the Southwest, I played about 200 games a year for many years. In fact, the softball on the shelf at the office is one I hit over a 300′ fence twice in one game at age 55, so I could “bring it” as the kids say.
With my hometown team playing, I might find the national tournament as irresistible as the Utah scenery and play hooky for a few days this week.
The workaholic in me will have the laptop in the motor home to get a little work in between games. I just love the freedom that technology gives me these days.
Q: Mary’s father has five daughters:
Nana, Nena, Nina, Nona and____? What is the name of the fifth daughter?
A: No, it’s not Nuna…..it’s Mary
How’s the market doing?
The stock market hasn’t made any progress for 3 months as of this writing on May 15th, with the S&P 500 Index** below where it was on February 18th. This means there has been no reward for a lot of risk taken. This is a time for investors to be cautious.
Day-to-day volatility, which often precedes a market decline, is going up, too. This increases the probability that the market is in the process of forming a top, another reason to be cautious as market tops are places from which stock prices come down.
The two things that have caused more stock market declines than any other factors are rising oil prices and rising in terest rates. Both operate like a tax to take money out of your pocket – money that you cannot spend to keep the economy going.
We certainly have rising oil prices right now, and the only reason interest rates have not risen is that the Federal Reserve has their thumb on the scale by printing a gazillion new dollars to buy bonds which keeps interest rates low.
But the Fed has said they will stop manipulating the market next month, so some investors may be selling now in anticipation that interest rates may deliver the second part of the double whammy this summer.
Remember, the market does not react to what is happening today, but on what owners of stocks and bonds think will happen in the future.
The silver market really took a big hit – capital B – just as my last newsletter was going out to you, dropping 30% in just a few days. Yikes! Fortunately for Hepburn Capital clients I had already begun to move out of silver, so we held onto the good profit we made on that trade.
Interestingly, silver topped out within pennies of its previous high price set in 1980 during the Hunt brother’s ill-fated attempt to corner the silver market. Two tops at the same price, even though they were 31 years apart, is what we call a “double top”.
What makes the price action around double tops significant is that the second top normally generates a wave of selling from investors who bought at or near the earlier top and have held a loser ever since, kicking themselves every time they think about the investment.
The urge to at least break even to save face is a powerful one, so as we get close to a double top, lots of sellers emerge, making it hard for the market to continue up while they soothe their angst. This is why it is so hard to break through an earlier top.
Being aware of this dynamic among investors, I anticipated the resistance as silver prices approached $50 and was ready to sell quickly.
This foresight is just one of the skills a professional money manager should bring to the table. If yours does not display this trait, call me for a free consultation to discuss all the choices available to you. (928) 778-4000
What We Were Saying Back Then
From my April 28, 2009 newsletter:
“I am just amazed at the buzz created over the swine flu in just the past few days. . . . Now after just 3 days everyone is looking over their shoulder for swine waiting in ambush. Yet reports discuss mere handfuls of cases, and they are described as “mild”. I’m not going to change my lifestyle or investment posture for a mild disease that appears on the worldwide scene in 3 days. I expect it will disappear just as quickly.”
“As they say back east, “fuggedaboutit”.”
Back to the present:
After that article, a friend from grammar school, who is a doctor with the U.S. Public Health Service, scolded me for discouraging people from getting vaccinated for swine flu. Although I was right on that particular call, and the whole thing turned out to be more of a grab for government resources by health providers than a real epidemic, vaccinations are truly one of the greatest medical breakthroughs of the past 100 years and should not be dissed, missed or dismissed.
Polio and small pox, each scourges in their time, have been eliminated as health threats, and malaria, measles and more diseases are on their way out thanks to worldwide vaccination programs organized by our government.
Recently I was vaccinated for both pneumonia and shingles, one being deadly, perhaps even more so as we grow older, and the other a royal pain for those who get it.
I would encourage all of you to look into these new vaccines. Unlike swine flu, their threat is real and easily dealt with thanks to modern medicine.
Please Don’t Keep Me a Secret
The best compliment you can ever give me is to mention my name to friends who are dealing with financial decisions. But how do you describe what I do? After all, I am not your typical investment guy.
You could give my smart aleck description, “He dodges bullets for me”.
The slightly longer version is that I protect your money with strategies that Adapt to Changing Markets®. That includes a daily analysis of every investment I manage for you. Over the years, I have helped hundreds of
families retire comfortably – despite recessions, wars and market crashes – and I believe I can do that for your friends and family, too.
What’s Going On In Your Portfolio?
As you might surmise from earlier comments in this newsletter, both our Careful Growth* and Flexible Income* portfolios are completely out of silver at the moment. We still own gold, since its rise was much more orderly than silver’s, so as expected, its decline was much more moderate, too.
Our Careful Growth* portfolios have seen cash levels raised to around 30% to reduce exposure to a stock market that is looking a bit iffy. The growth stocks we still hold, about 55% of the portfolio, are earnings powerhouses that are not quite to the point where my safety net analysis says “sell”, but I am watching them closely.
While I think some market decline is possible over the next couple of weeks, I am not sure that the current bull market is over for good, so I am trying to be patient and not get defensive too quickly. But, you can count on the fact that if this current correction does turn into a full fledged decline, I will quickly move to defend your portfolio values.
Flexible Income* accounts are currently 85% invested, 15% cash, with the mix of holdings that have not changed much recently.
SRI* portfolios are invested very much like Careful Growth*, and Municipal Income* portfolios are fully invested in short term, high credit-quality muni funds.
Our Spotlight Strategy
For our Socially Responsible Investment clients, we invest using the same methodology as our Flexible Income*, Careful Growth* and Balanced Growth*, non-SRI portfolios. What changes is our use of socially screened mutual funds and ETFs when they are available in the appropriate market sectors.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.