China experienced its first trade deficit in seven years, and there was rumor of violence in Saudi Arabia. Additionally, in an unusual trend, both the price of oil and the markets decreased nearly 3% for the week. Overall, the markets are near a 5% decrease from the year’s high, which happens on average three times a year. We are not near a moderate correction of 10%, which happens about once a year. Year-to-date, the Standard & Poor’s 500 index was up 2.98% on March 7th.
Many investors interpreted Individual data points and one-day performance as trends this week, but we found plenty of positive news in the economic reports.
Broad Picture Economics
- Tuesday’s Chain store sales report showed sales were up 2.3%, continuing an upward trend that began at the end of January 2011.
- Initial jobless claims missed estimates and increased by 26,000 to 397,000 for the week ending March 5, 2011.
- This was not surprising as claims had fallen sharply in the prior two weeks.
- This increase remains consistent with gradually improving labor market conditions.
- Layoffs are slowing and there are predicted hirings.
Interest Rates remained relatively flat for the week
- Two-year U.S. Treasury yield held steady at 0.68%;
- Five-year and 10-year Treasury yields dropped slightly to 2.13% and 3.46%, respectively, and
- 30-year Treasury yield remained unchanged at 4.60%
What are the investment implications of Bill Gross, investment manager of PIMCO’s $252.2 billion Total Return Fund, selling out of U.S. Treasury bonds and TIPS?
- As one of the world’s largest mutual fund managers, Bill Gross, can move markets with his comments.
- His actions may spook investors to sell their bonds.
- His actions are not a statement about the health of U.S. financial markets.
- He is confirming our belief that U.S. Treasuries are not attractive at current interest rates.
- As bonds are sold, interest rates will rise, and then he likely will begin buying bonds.
- Interest rates did not increase this week, because the Federal Reserve is still buying bonds as part of QE2.
How did China experience a trade deficit? Not all products are “made in China” anymore.
- The United States cut back on purchases, providing little growth.
- China has caught up with technology.
- In order to generate new products, China will have to design it themselves.
- They cannot rely on themselves to be the cheapest labor source.
- Chinese salaries have increased, and worker demands have increased.
- China’s imports from South Africa increased 174%; from Canada by 114%, and from Australia by 53%.
- China is importing commodities.
- Commodity prices are experiencing an upward trend in price.
How long can our economy survive with gasoline selling for $3.50 to $4 a gallon before it pushes us into a recession? We deem the economy can sustain the increase in gas for quite a long time. We believe we are in an oil bubble, with countries buying in anticipation of an increase.
- Oil needs to be selling between $130 and $140 a barrel before it impacts Gross Domestic Product by 1%.
- Oil is currently around $100 a barrel. We infer people are purchasing in anticipation of an increase.
- There is no shortage of oil.
- Saudi Arabia has more than made up for the decrease of supply from Egypt and Libya.
- Storage is at very high levels.
What should investors buy if they believe inflation is coming and interest rates will increase? We believe the best buy for investors is Large Cap companies that can continue to grow through inflation. Financially strong companies with strong cash flow will not have to borrow or issue new stock to raise capital as interest rates increase. We are still bullish on the markets, because we believe our economy can continue to grow through the inflation.
- We look for companies that have pricing power and can pass on increases.
- The cost of production will increase for companies like Procter & Gamble (NYSE: PG) and 3M (NYSE: MMM); however with $15 billion to $20 billion in market share for their products, they have pricing power and can push increases to the consumer.
- We review companies’ 10-Ks and see that our holdings have learned from the oil spike in 2008. They are hedging their use of commodities better.
- Consider:
- Technology: Cost of materials is a small part of the price of the goods, so increases in commodities should not affect them as much.
- Timber companies: The cost of trees has been absorbed over the last 30 years.
- Avoid:
- Airlines: The cost of fuel is 40% to 50% of their service.
- Consumer Durables: The cost of materials for washers and dryers is increasing and companies like Whirlpool Corporation (NYSE: WHR) cannot pass on the increase of the product.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
