Thursday, February 28, 2013 – How Now, Dow Jones

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How Now, Dow Jones
by Sinclair Noe
DOW – 20 = 14,054
SPX – 1 = 1514
NAS – 2 = 3160
10 YR YLD – .02 = 1.89%
OIL – .91 = 91.85
GOLD – 16.80 = 1580.50
SILV – .47 = 28.61
Kate can now marry Herbert; or is it Charley? I don’t remember; the idea was part of a play from the late 60’s, called “How Now, Dow Jones” and the idea was that the girl had been engaged for about 4 years to a stock broker, and the guy was putting off marriage on the pretext of having to wait until the Dow Industrial hit a record high, which back then meant a move above 1,000. The Dow closed above 1,000 in November 1972, and then it floundered through the 70’s and didn’t close above 1,000 again until 1982. So, we didn’t hit the record high today. No milk and cookies. I don’t remember what happened to Kate. Records are made to be broken but its not easy. Even when the Federal Reserve is juicing the market, it isn’t easy.
Records are may to be broken. It doesn’t happen when you expect. The Nasdaq is still some 38% below its all-time high of 5,132.50, which was hit on March 10, 2000. In inflation-adjusted terms, this market average is more than 53% off its March 2000 high. The Dow Industrials closed at a nominal high of 14,164.53 on October 9, 2007. However, if you adjust the price for inflation, using the CPI, we’d have to hit 15,639 to really hit a record; so, we still have about 10% to go. Adjusting the price with the GDP deflator, which considers economy-wide inflation instead of consumer level inflation, then the high is 15,359. On an inflation adjusted basis, the Dow is still below the 1966, 1972, and 1982 highs.
Of course, that doesn’t prove anything. I’m not telling you to buy or sell. I’m not a Wall Street flack. The bears have good points. The bulls have good points. The markets are up 15% since Thanksgiving. This past week has been much more volatile. We are at some pretty significant resistance levels. My view is to keep it simple. Unless you are a day trader or a very active trader, I’ve been telling you for a long time to consider the “Best Six Months, Worst Six Months” method. You sell in May and stay away. You get back in in November.
This has worked quite nicely for a long time. The Spring of 2009 was an exception; that was the beginning of a strong uptrend that you would have missed; it wouldn’t have cost you a realized loss, just a missed opportunity. The past couple of years we’ve seen strong moves from the start of the year through mid-February, a slight pullback in March and then another bounce higher in April before undergoing larger pullbacks over the summer. So, this simple approach has been a real winner. You’re welcome.
I’m just saying, don’t get caught up in the hype. Keep it simple.
Speaking of hype. Buckle your seat belt, make sure all snack trays are in the full upright and locked positions. Brace for impact. The sequester hits tomorrow, probably. You won’t feel it right away; it won’t be a sudden impact, more like a plane losing power and going into a downward glide. Some folks will tell you it’s not a big deal. The argument is that it’s just a 2.3% cut. That doesn’t sound so bad, but timing is …. everything.
The timing and the method of cutting is important. If I go on a diet and lose 2.3% of my body weight, you would hardly notice. If you cut off my hand I would also lose about the same amount of weight immediately, but it would not be good. The budget mess is far more complicated than the simplistic idea of cutting 2.3%. For one thing, these new spending cuts would come on top of $1.7 trillion of spending reductions already set to take effect over a decade. For another, the spending reductions mandated by the sequester legislation are confined to a group of programs representing less than half of the budget.
Even within this select group, all programs are not alike. Medicare is slated to be trimmed by only 2 percent, while a 7.9 percent reduction will be imposed on the military. Cuts in military spending are blamed for a fourth quarter slowdown. By the way, fourth quarter GDP was revised today from a negative 0.1% to a positive o.1%. Toss in the payroll tax increase that started at the first of the year, then add in higher gasoline prices, and then look at the automatic cuts triggered by the sequester, and there is a strong chance we are still a long way from anything resembling robust growth.
Nondefense discretionary spending, everything from education aid to research grants, will be reduced by 5.3 percent. Under the budget legislation, in agencies and programs that are not exempt, the cuts must occur indiscriminately, across the board. So, yes, there will be some wasteful and silly programs that are cut; but there will also be some wasteful and silly programs that are not cut. There will be some programs, maybe the cancer research that could have saved your life 10 years from now, that will also be cut. Tough luck.
Finally, the legislation requires that the cuts take effect immediately, rather than being phased in over a number of years, as would be appropriate in such a weak economy. House Republicans have floated the idea of giving Mr. Obama more discretion over how to enact the cuts. A party that says it can’t trust Obama enough to negotiate with him would trust him so much as to grant him exceptional power. The contradiction is so glaring that Republicans are split on the idea, and it’s foolish anyway. As a senior administration official suggested, it’s like being told that two of your fingers will be cut off but you could choose which fingers. How is it a “concession” to ask Obama to organize the cuts he says would be a disaster? He isn’t falling for that one; because with discretion comes blame. Meanwhile, the Republicans refuse tax increases. So, for now we are looking at cuts on top of two years of cuts. If sequestration remains in place, we will have taken $3.5 trillion out of the projected budget deficits of the coming decade. 
Most of the burden of deficit reduction will fall on only a portion of the government, nondefense discretionary spending, which includes those key investment areas like education and infrastructure; these areas constitute only 14 percent of the federal budget but is they’ll bear 44 percent of the cuts. All told, the three rounds of cuts will reduce expenditures on these items by 16 percent; a lot more than the phony 2.3 percent number.
Similarly, the Defense Department, which also represents 14 percent of the budget, will bear 38 percent of the cuts. Meanwhile, entitlements; Medicare, Medicaid and Social Security will face only a 4 percent reduction, even though they total nearly half of all federal spending. Do we need structural reforms to our health care system? Yes. Do we need structural reforms to the tax code? Yes.
Nondefense discretionary programs sounds like some bureaucratic mumbo-jumbo, but it includes things like infrastructure, in other words, an investment in our productivity, our competitive advantage and our future. In the early 1950s, government devoted about 1.2 percent of gross domestic product to infrastructure; by 2010, that amount had fallen to just 0.2 percent. Meanwhile, federal spending on research and development dropped from a high of nearly 2 percent in 1964 to 0.9 percent in 2009.
It may be fun to say you want spending cuts across-the-board but you probably also think it is fun to drive safely on a bridge and have cargo safely transported via rail. Infrastructure investments are not short-term. It takes time to build a highway, or a railroad, or an airport, or a research lab, or a university; and they are expected to last over time. The politicians in Washington can’t seem to think beyond the next six months.
Despite the fact that working out budgets is mostly what we hire members of Congress to do, they seem to have a terrible time doing it on time, and instead routinely rely upon the continuing resolutions, which is political lingo for kicking the can down the road, to keep funding levels static for some ludicrously short-term period like six months.
The failure to work out sensible budgets makes it impossible for government agencies to make long-term plans, and instead leaves them scrambling to spend money in the short term. It’s an incredibly stupid way of doing business. I understand that politics is ugly but this doesn’t even qualify as real politicking; that would involve negotiating and compromising and maybe a little pork barrel wheeling and dealing to bring some bacon back to the home district without crossing the line into antipatriotic acts of self-destruction; like a national default, for instance. This is just crazy ugly.
Both parties understood that the debt situation had to be addressed. But neither side could think of a way to work with the other party to get that done in a way that didn’t outrage its base. So what we ended up with a plan of mutually assured destruction. Each side has strapped dynamite to their chest and tomorrow they will light the fuse and try to manipulate the media to blame the other side for the fallout.
But when the sequestration hits, and like I said, it won’t be a sudden impact; but when it hits, you will feel it. 

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