We love the pundits in the papers and on CNBC that continue to say that it is uncertainty alone that is causing the market to dip.  While we do agree there are some major uncertainties out there causing angst, there are always uncertainties about the market.  The major uncertainties today include Europe, the upcoming US election and Iran.  In trying to make sense of this market, we would rather stick with the facts.

There are some major reasons that we believe are pertinent to why we have a more conservative stance on the market than most.

1.) Europe

• Europe is in a recession.
• Greece is in chaos.  Tourism is its main source of commerce and bookings are down 50% this summer.   This past weekend, a 90 year-old mother and 60 year- old son holding hands jumped to their deaths from a five-story building because of economic strife.
• CDS (credit default swaps) costs on Spain’s sovereign debt have risen from 350 in February to an all-time high of 594 today.  In other words, the cost to protect an investment in Spanish bonds has now surpassed the critical level of 500 that is considered by most as the level that means a default is much more likely to occur.
• There is a bank run in Southern Europe as depositors have withdrawn vast amounts of money out of the banks.  The US dollar is once again becoming the world’s only reserve currency as the Euro has fallen more than 6% versus the dollar just this month.

2.) China

• China’s growth rate is slowing down and their real estate bubble is just at the beginning stage of deflating.    Europe is China’s number one trading partner; a slowdown in Europe means a slowdown for China.

3.) Stock markets early economic indicator

• The stock market is always an early indicator of what will happen in the economy.   The stock market falls in advance of an economic slowdown and rises before the economy recovers.   Stock market returns around the world since the end of March (Spain -25%, Italy -21%, Brazil -18%, Japan -15%) indicate a rough patch in the world economy is on its way.

4.) Corporate Profits will be under pressure

• Corporate profits as a % of GDP is the highest it has been over the last 50 years.  With corporate profits at a high and worker productivity falling, this is a toxic mix for a fall in corporate profits.  Add on top of this that 49% of S&P 500 company sales are from overseas.   Moreover, a strong dollar is not good for earnings.   Why?  Companies got 6% less US Dollars for every sale in Euro’s just in the past month.

Managing risk is still our number one objective at this time.  However, the foundation for a recovery in the market is being built as commodity prices and interest rates fall.  In our opinion, the sooner they dissolve the Euro the better.  Slapping lipstick on this pig isn’t going to solve Europe’s underlying problems.
Sincerely,

Your THOR Team