Market
Comment
by
Ed
Dedelow
I have been asked by several
people about the stock market and the
prospects for future appreciation. I cannot
project the future and I am a firm believer
that each of us should make our own decisions.
So, my comments should not be a sole basis
for your actions.
The concerns I have heard
display wonder at the current run up in
the market given the economic conditions.
History suggests that markets always over
sell and over buy. There is, however,
some support for the market increase as
many listed businesses have laid off personnel,
reduced operating costs, suspended research,
and limited asset expansion and purchases
to those in the pipe line and to necessary
replacements. The market corrects, but
so do businesses. The question is, will
these companies sustain earnings growth?
Keep these things in mind.
Your investment counselor is aware of
historical tendencies for market corrections
and likely encourages investments in anticipation
of market corrections. A buy low sell
high scenario. Many firms sell investment
products or are brokerages and make their
living off of you buying and selling stocks.
They are sales people! They encourage
selling or buying. An independent counselor,
however, who is paid for advice and who
does not make money selling products,
can give you the best advice. But, they
may also be too conservative for your
taste.
As to my personal point
of view, I am very cautious. CDs are only
going to produce 1 to 2% returns given
the flood in the cash market. I would
look instead, for dividend producing stocks
of foreign companies, with some liquidity.
These are some of my investment
concerns.
1. Despite the current market
conditions, billions are flowing into
mutual funds and the market. Funds are
obligated to invest the money and brokerages
will promote purchases. Therefore, I question
the motivation behind the market increase.
2. Despite improvements in earnings for
some companies, our current government
is in a tax and spend mode. This puts
a lot of pressure on private businesses
to cut costs, cut wages and restrict expansion.
Small companies are more likely to go
out of business rather than expand. Because
of this, the job market may not improve
for a long time. The consumer is not likely
to have more money to spend. Companies
will be looking for ways to make operations
more efficient and there will be some
select businesses that will do well.
3. Some foreign governments are considering
other ways to trade besides the dollar.
If this happens, and it will unless the
US suddenly becomes more productive, devaluation
of the dollar will result, and we will
pay higher prices for the 2.5 trillion
plus dollars of products we import ie.
inflation.
4. Markets often reflect rate conditions.
Markets go up when interest rates decline,
and go down when rates rise. If we experience
inflation, rates will go up.
5. The dollar has declined about 38% since
2001 following a run up from about 1989.
The run up occurred after the fall of
the Berlin Wall when capitalism began
to spread and the world needed a currency
for trade. The US received benefits from
this at that time. However, those benefits
were, for the most part, sucked up by
the expansion of government. The bloom
is off the rose and the decline that was
occurring prior to 1989 has continued.
6. Gold has recently increased
from $920 to $1095 coming from below $400
not to many years ago. China is buying
more gold and stock piling commodities
and using dollars to do it. India is considering
moving to a gold standard. These are signs
of a possible continuance in the fall
of the dollar.
7. The devaluation of a
strong world currency is not unprecedented.
The British Commonwealth supported a tremendous
bureaucracy and armed forces to protect
the Empire which fostered cheap imports.
With the dominance of the dollar and the
fall of the British Empire, the Pound
suffered a drastic decline as did living
standards on the British Isle. Do not
expect anything different in the US unless
our bureaucracy suffers a decline of its
own.
8. Cutting taxes is one
thing, but government has far too many
built in cost increases. Unless the economics
of government change and the government's
demand on the economy is reduced, even
the TEA parties cannot save the decline
in wages and higher cost of consumer goods.
9. A lot of money is flowing
into government wage increases. Government
employees have secure jobs, and long periods
of uninterrupted employment and yet they
have the same outlook on savings as other
citizens. They are more likely to save
than to spend, which is the opposite of
what the administration thinks will happen.
You decide what you think
is in the future and whether the stock
market will continue to go up.
Think about it.
Think outside the box.
Scientific Capitalist http://scientificcapitalist.com/
