Friday, April 10, 2009

For the last 10 years the Nikkei 225 and the S&P 500 have followed the same path.

I have been saying for a substantial period of time that I thought the economic recovery when it comes,would.not be like most post World War ll expansions. In fact I believe that it will look more like the recovery, if you can call it that, in Japan. The chart above shows how the S&P 500 and the Nikkei 225 have been in lock step for a number years. When the market hit bottom in mid March, the S&P hit 12 year lows. In other words, if you had invested $10,000 in the S&P 500 index 12 years ago, at the most recent market bottom, your $10,000 was worth $10,000. If you adjusted for inflation through that period you really only had a value of $7,851 in 1997 dollars.

It is Springtime and hope springs eternal. The same is true for the markets; hope floats all over the street. Now is not the time to be a bear on the markets. Bears will have their day very soon and all the hope will be replaced once again with fear. It’s like the bedtime story of Goldilocks and the Three Bears. Every time she tried something like food or a bed, one was too hot and one was too cold . Finally, she found the one that was just right. One could say that the Chairman of the Federal Reserve Board and the current and most recent Secretary of the Treasury, have been looking for the right solution to our economic problems like the most comfortable bed in Goldilocks. They try something and if it doesn’t get the right response, they try something else. My guess is that sooner or later they will find the right combination of spending and incentives to start the economy growing again.

The challenge will be, can they sustain the economy over extended periods of time? I keep referring to the Japanese economy as a reference point. The Nikkei 225 was over 38,000 when it hit its high in 1985. Here we are 24 years later and the Nikkei 225 is just about 800 points below the American Dow Jones. Both the Dow Jones and the S&P 500 hit their all time highs in October of 2007, around 14,000 for the Dow and over 1400 for the S&P 500. The real market question is: will we still be waiting to set a new high in the American markets 24 years from now?

Dan Perkins




Friday, April 3, 2009

What a Dichotomy in Labor Today

The American labor movement is between a rock and a hard place as it relates to UAW at GM and Chrysler and perhaps the other labor unions. The Federal Congress is considering a bill that would take away the secret ballot for union organizing. At the same time, the White House and the President are telling the UAW that they will have to make some serious concession if GM and Chrysler are going to avoid bankruptcy.

I wrote in the blog on two occasions recently that I felt that the outcome of the problems with the big three might have a significant impact on labor agreements across the United States. Recently I posted my thoughts on however the the problems with auto companies causing a correction in the markets,auto companies alone are not enough to make the markets test their previous lows.

I also suggested that the markets were not going to go straight up to 8,500 on the Dow Jones or 900 on the S&P 500. Regardless of the auto problems, we are in a strong rally in a bear market. If I’m right on the targets for the markets pressure from the rally of Tuesday the 31 of March and any additional follow through will start to make investors with a great deal of cash very nervous.

I find it fascinating that a Democratic controlled Congress is willing to give the unions more power to organize through the elimination of the secret ballot while at the same time a Democratic President is trying to take away some of the benefits gained by the unions in collective bargaining. The concessions made by the UAW will surely have to spillover into other union contracts.

Here is the big question. Will the UAW sacrifice the 775,000 GM retirees to protect the working members? For that matter will all of the unions give up the benefits for the retirees in favor of protecting the employed members? I think the answer is yes!! If the unions can avoid a bankruptcy at GM and Chrysler, then they can protect some of the retiree benefits. On the other hand should both firms file for bankruptcy then the retirement pensions will come under the Pension Benefit Guarantee Corporation, an agency of the Federal Government.

When other companies that have union defined benefit pension plans have gone into bankruptcy, the amount of the pensions has been reduced in some cases as much as 50%. If we look at the GM pension plan, my guess is that the portfolio value is down between 25% and 40%. This amount does not include the billions the plan may be under funded which will also effects the level of current and future pensions.

The President gave Chrysler 30 days and GM 60 days to come up with a viable plan to save themselves. Bankruptcy is the next option. We will find out shortly the will of the unions and the bondholders in GM. Will labor make the give back necessary or will they choose to let these companies disappear? Who do you think will blink first, the government or labor?

Dan Perkins