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“Fat, Drunk And Stupid Is No Way To Go Through Life, Son”

By Mike Minter, CFP^®

Who knows? Maybe it is…

I mean, I would love to hop on the bandwagon and declare the recession has ended too, (not like anyone would listen) but from my viewpoint, not much has improved for the consumer in this country who just happens to make up 70% of the economy.

As a matter of fact, the last time I checked, foreclosures were hitting new highs (isn’t that what started the credit crisis), unemployment continues to rise and wage growth has slowed sharply.

However, I have to admit that I’m relieved Bernanke and Geithner are coming out publicly to declare the recession over since they didn’t see what was coming when they were helping set policies in the years prior to 2008. Wise men indeed…

But the party must go on even if temporary band aid fixes by our government will only prolong the inevitable hangover. Don’t get me wrong, the stimulus was probably a good short term solution and we are only in the early stages of it, but eventually it goes away. Considering it is only supposed to be around 3% of Gross Domestic Product over two years, I’d guess it is more than priced into the market at this point.

Then we come up with incentive programs like “Cash for Clunkers” so our already over levered consumer will buy another item they can’t afford. We’re already at record debt levels so why not have our citizen’s dig a little deeper into their pockets. It is just one more monthly payment for them to service for years to come. Time will tell how good of a short term jolt to the economy this really was. My bet is not a good one.

Despite my current pessimistic stance, we are up over 50% from the March lows and it could go further. If I have learned anything, the markets can be irrational for extended periods of time (i.e. the tech bubble) and you can’t fight the trend or momentum we are experiencing. We also have inventory rebuilding that should make Gross Domestic Product (GDP) look very strong for the next quarter or two. However, even with these encouraging signs and knowing you can’t time the markets; I am still cautious.

With all the upbeat news on the market rally and optimistic forecasts, many would probably disagree with me, but maybe we shouldn’t get too far ahead of ourselves.

First of all, as far as the market rally is concerned, the Dow was at 14,279 in October 2007 and is currently around 9,800. Translation – we are still well below where we were 2 years ago.

Second, we have had a nice rally, but overall in 2009, we are only up a little over 11% on the Dow and 17% on the S&P.

Let’s not forget how the beginning of this year started; or what is coming if not here already…

1. Valuations – Still expensive on many different fronts from Price to Earnings multiples (GAAP and Operating), Dividend Yields and Stock Market Capitalization as a percentage of GDP (one of Buffet’s favorite market indicators to watch).
   
   
2. Taxes – Don’t see how they don’t go up eventually. This leads back to the consumer not having as much to spend
   
   
3. Reform – Health Care and Financial. Don’t believe Wall Street will like either, although both lobbies are so strong, they may have Congress push it off again
   
   
4. Unemployment – Moving higher which does not bode well for housing, consumer spending or commercial real estate.
   
   
5. Housing – Next wave of foreclosures are starting and could get worse next year into 2011
   
   
6. Interest rates – Artificially pushed down and near historical lows. If they go up from here, it is more pain for those trying to pay off variable debt
   
   
7. Government policy – Stimulus has more to go, but other programs are ending. Stay tuned…
   
   
8. Debt – The unfortunate thing about debt is you eventually have to pay it back. If consumers couldn’t service their debt in the subprime crisis, how do they plan to do it now with less equity in their homes and beaten down portfolios? (Think of it this way: Even though portfolios and home values are down approximately 20-30% from their highs, you still owe 100% of your debts – this number hasn’t changed)

The title of this article “Fat, Drunk and Stupid is no way to go through life, Son” is a quote from Dean Wormer in Animal House. Maybe one day, we will thank him for his guidance.

Bottom Line…

• FAT – The economy looks this way because of transitory buffets (Stimulus, Federal Reserve-Treasury activity, Cash for Clunkers)
  
  
• DRUNK – The stock market rallying this much, this quickly
  
  
• STUPID – I want to support them but sometimes they just are – our government.
  
  
• SON – My wife and I were blessed with our second son a couple months ago. (Both baby and Mom are doing well.)

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