I’m traveling again and so this will run shorter than normal. This trip is a combination business trip and vacation so my wife Fay is along and we’re visiting my home town of Aiken, SC this weekend. I’ve promised to take her to the polo matches this afternoon so I’m on a tight deadline. We’ve still got another week on the road together and the last thing I want to do is disappoint on the vacation promises. I may not be able to predict the future course of the economy but I can say with certainty the outcome if I don’t keep the promise I made about taking some time off.

A few observations about last week’s action:

  • Stocks rallied last week but the S&P failed to make new highs and from a technical perspective  the failure to break out in the face of fairly positive economic news is a bit ominous. In looking at the various market moving data and other news last week the thing that continues to stand out – at least to me – is the complete lack of direction. Whether one looks at the economic data and the potential for recession or the election and the potential for fiscal cliff diving, the only thing I can say with certainty is that the outcomes are uncertain.
  • Last week’s economic data had positive aspects – both ISM surveys improved, mortgage applications surged (particularly for refinance), jobless claims held steady below 400k and the economy managed to add some jobs – and some negatives as well – construction spending fell, chain store same store sales were uninspiring, factory orders plunged and consumer credit expanded on the back of another surge in student loans. I know a lot of folks would put that last one in the positive column but I have a hard time cheering more debt, no matter its use.
  • The jobs report was the source of considerable controversy with Jack Welch the former GE CEO leading the conspiracy theorists in a tweet that accused the administration of cooking the books to gain an election advantage. While I wouldn’t put anything past a politician of either party, there are so many other ways to explain the bifurcated nature of the report that resorting to conspiracy theories is not required and probably says more about the theorist than the alleged conspiracist. The household survey was the source of the agita and that really tells you all you need to know. This survey is notoriously volatile and August brought a number of potential adjustment problems to boot. I won’t review them all but one thing that stood out to me was the number of persons working part time for economic reasons which jumped by 582k. My guess is that this is related to the expiration of extended unemployment benefits. As people roll off the 99 week cliff, they are taking whatever job they can find and a lot of them are apparently part time. I emphasize that this is just  a guess but I did write a post a couple of months ago that warned of a coming rise in employment. If you stop paying people to stay unemployed, they’ll take any job they can find.
  • Oil prices closed Friday under $90 and absent some exogenous event, appear to be headed lower. Supplies are plentiful and technically oil has made a series of lower highs since the peak in 2008. This is good news for the economy but could be much better if the Fed – and the politicians – were not determined to weaken the dollar.
  • In a similar vein, most commodities are not acting that well with some notable exceptions. The drag of a slower Chinese economy is hurting industrial commodities while the precious metals are doing relatively better. Gold and platinum – both of which we own – have performed very well and with more QE in the pipeline that seems likely to continue. Whether the industrials can overcome the Chinese slowdown is less certain but if the dollar keeps falling I wouldn’t want to be short.
  • Another factor in keeping oil prices down may be the turmoil in Iran. No, not the potential Israeli strike on their nuclear facilities. In case you missed it, the Iranian Rial has collapsed by 60% in the last couple of weeks and that does not bode well for the current leadership. Collapsing currencies and hyperinflation are what revolutions are made of.
  • Oh, by the way, Europe is still in a mess. Spain wants a bailout, it doesn’t want a bailout, Catalonia wants to secede, France is taxing its way to prosperity, Greece is, well Greece and the economy continues to tank if not quite at the previous scary rate. In other words, we’re looking for investments where the worst news dominates. Whether that is Europe or China right now is a coin flip.
  • Earnings season is coming up and estimates, in our opinion, continue to look overly optimistic. We remain defensive with respect to US stocks and the markets in general. The global economy continues to look as it has for the last few years, moving from weak growth to less weak growth and robust growth among the missing. I didn’t watch all the debate last week but what I did see didn’t inspire any confidence that the future looks any brighter than the recent past. We continue to need major policy changes and neither candidate seems interested in taking the necessary short term pain involved in getting our economy back on track. I did find it interesting that the market rallied on the perceived Romney win. I think that might be the triumph of hope over experience.
  • The third quarter is over and Alhambra put up solid numbers. Our Stock portfolio, Global Opportunities, lagged its benchmark by a bit as we became more defensive throughout the quarter. We are still ahead for the Year to date, 1 year, 3 year and since inception periods. Our asset allocation portfolio, World Allocation, outperformed its benchmark for the quarter as did our bond portfolios. We’ll send out a more detailed report during the week.

That’ll have to do for this week as Fay is giving me the evil eye and pointing at the clock. I won’t be writing next week  – Doug Terry will take over in my absence – since I have a date with several golf courses in Hilton Head but I’ll be back in a couple of weeks. Stay conservative and keep it in the fairway while I’m gone.

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@4kb.d43.myftpupload.com or  786-249-3773.

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