This is Tom McIntyre with another client only update as of

Monday morning the 14th day of May 2012

Stocks have endured a rough couple of weeks as it has finally become obvious to everyone that the so-called recovery in the US has been a mirage while the difficulties in Europe have never been addressed. The latter problem is due to the flawed structure of the European Monetary Union, while our problem has to do with an incorrect mixture of policy choices from Washington and in many of our larger states such as California and Illinois.

As the charts above illustrate, last week saw a decline of 1.7% for the Dow Jones Industrial Average and .76% for the NASDAQ Composite. These declines were very modest compared to the carnage in Europe and Asia.

The Markets & Economy

There can no longer be any spinning from the White House concerning the job market and income growth. We simply do not have any. Tax receipts are flat and personal income growth is nonexistent.  Instead of dealing with these problems, the nation is being subjected to a barrage of cultural issues for which the office of the President actually has little power to impact. These are state matters according to everyone from the President on down.

At the same time, the news from Europe is ghastly. Those socialistic countries have created a structure which creates dependency and penalizes initiative. France has just elected a socialist president (albeit one with THREE mansions on the French Riviera) who wishes to reduce the retirement age, increase government spending, and waive the deficit rules just recently agreed to.

Keep in mind, the government sector already accounts for fully 50% of the French economy. This entire fiscal disaster is accompanied by the monetary union treaty that obligates France to keep spending within bounds, or else. The or else is, of course, what has now happened in Greece and is happening in Spain, Portugal and Italy.

In other words, the European monetary union is now dead. The only thing left is to figure out how to dismantle it with the least amount of economic damage. At the same time the political will throughout Europe has collapsed. These people simply do not know what to do, and as a result, fringe political parties on both the left and right are being elected. Trouble is ahead and that is for sure.

Back in America, one would think that our leaders would see these developments and seek to take steps to allow us to avoid any such scenario from happening here. Instead, what do we get? The governor of California (who was first elected in the 1970’s) is announcing a doubling in their budget deficit. His policy response (the same one for forty years) is to raise state taxes that are already the highest in the country.

California has become our Greece and there will be more states to follow. At the federal government level over 50 percent of the spending is based upon borrowed money, there are no proposals from the current administration on how to handle these issues. In fact, our government has not passed a budget under the Obama administration. Incredible and where is the media coverage? Instead we are bombarded with wedge issues on a daily basis in an attempt to fool the electorate until after the election.

For instance, how many people out there understand that under current law, the tax rate on dividends, and interest next year will zoom to over 40%?  Don’t expect to hear this discussed before November. Does anyone really think our economy can absorb this sort of tax hike next year? While Warren Buffett will be happy the rest of us will feel duped that the campaign largely ignored issues that actually make a difference to people.

From the market’s point of view, these issues are well understood. Meaning, quite a bit of bad or disappointing news is already in current stock prices. That is why our market, in particular, has proven so resilient. A zero percent interest rate policy from the Federal Reserve Board, and strong earnings, and dividend increases continue to make stocks attractive compared to bonds or real estate.

The problem is that growth is lacking, and without it societal pressures and tensions will be on the rise here and overseas, you could even see revolution and border skirmishes as countries start to impose capital controls of one kind or another. Thus our strategy is to have some cash for opportunities, and focus on global leaders who can actually improve their competitive position throughout this ugly cleansing process which I discussed above.

What to Expect This Week

I have one word here and that is Greece. They have a bond payment due under English law tomorrow, and they have not said whether they will honor it. If they do then some additional time will have been bought. If not, then the exit from the Euro zone has happened.

At home, the debate on the economy is no longer a debate. We have ground to a halt no matter how it is measured. No jobs, flat earnings, slowing of exports etc… Just listen to the Cisco earnings call from last week to get the details.

With this we have seen a drop in commodity prices, which brings us ever closer to the FED making another move to goose the stock market. With the ten year Treasury bond below 1.8%, the coast is clear for the FED to move, and while this would do nothing for the economy it would goose the stock market. Look also for the ECB to be forced into another round of easing unless, of course, it simply gives up.

Finally, the update from the Economic Cycle Research Institute is not good. The charts below show that the index is now some 3.8% lower than last year, and nobody thought that it was any good at this time last year. I continue not to look for a formal double dip recession because we never actually recovered from the 2008 decline. I just think the economic growth rate is going to fall before it rises. Depending upon the Fed’s policy moves, and perhaps its influence on the election, this just might be very bullish for stock prices in a counter-intuitive way.

   MarketWatch with Chuck Jaffe interviewing Tom on April 30, 2012

Brochure March 2012