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Daniel J. Disimile, CFP
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APRIL 15, 2011 SECOND QUARTER COMMENTS

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HELTER SKELTER

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  Dow Jones Industrial Average  
 

WHEN I GET TO THE BOTTOM, I GO BACK TO THE TOP OF THE SLIDE…

From the August 2010 lows, to the February 18, 2011 high, the S & P 500 gained 30%.
One month later on March 16, intraday, the index lost all of its gains for the year and declined 6.4%
on a closing basis from the February highs. We saw capitulation and then, things turned around fast.

Three days after the March 16 low, the Dow gained 500 points and four days later another 200 points.
When the quarter ended, the Dow had posted its second best first quarter gain, EVER.

The S&P 500 had its best first quarter since 1998, when it gained 13% as the tech bubble was inflating. This year, the quarterly gain was ONLY 5.6 %.

All while revolutions and civil wars spread throughout the Middle East, a nuclear meltdown and tsunami hit Japan, Europe tries to keep banks and countries solvent, with oil and food inflation threatening global stability. Strong markets climb a wall of worry. Could there be anything more to worry about?

Interest rates at historic lows, corporate profits at historic highs, and with Carmelo Anthony back home, Wall Street was in a good mood during this first quarter of 2011.

GREET THE BRAND NEW DAY...THE SUN IS UP, THE SKY IS BLUE…

The average duration of bull markets since 1932 has been 3.8 years.
Our current bull turned two in March. Nearly 80% of all bull markets survive two years.
The average gain of the past 15 bull markets has been 136%. This is why we own stocks.

In a bull market, the gains are the largest in the first and last quarters.
Assuming 3.8 years, the last quarter arrives July 2012, just in time for our election shenanigans.

First time claims for unemployment are falling and the work force expanded in February and March. The 8.8% unemployment rate is at a two year low. The Federal Reserve is still pumping liquidity into the system and the economy is growing. Companies are boosting dividends, stock buybacks are ahead of last year’s pace and we have already seen $250 billion in takeovers in 2011.

Take a look around. If the recovery starts looking like an expansion…..that is bullish.


THE DEEPER YOU GO, THE HIGHER YOU FLY…

The strongest stock market period in the presidential election cycle is from the low before the mid-term election, to the high after the election. This usually happens during the 3rd year of a presidential cycle and over the past five mid-term elections, during this period, the S & P 500 has averaged a 41% gain.

When combining the fourth quarter and the first quarter of the year following the past five mid-term elections, this has been the strongest period for stocks and has averaged a +7.9% compounded gain. In comparison, the average performance during the second and third quarters of these years was - 6.4%.

2011 is a pre- election year, which are usually positive for stocks as the administration tries to fire up the economy so voters will be feeling good at election time. In three of the past four pre-election years, the Dow Jones Industrial Average posted 20% plus gains, and while some fiscal sanity would help make that target a reality, the way our legislators spend our money, it won’t come easy.

THE HIGHER YOU FLY, THE DEEPER YOU GO…

A long, long, long, time ago, back in 2007:

53% of the U. S. Federal Budget was for Mandatory Spending programs. Of this amount, 42% went to Social Security, Medicare and Medicaid and 11% for federal civilian and military retirement benefits, veteran and unemployment benefits, disability benefits, and programs for food, nutrition and welfare.

42% of the budget covered Discretionary Spending programs for congress, defense, housing, highways, federal courts, education, museums, national parks and everything else.

9% of the budget pays the interest on the debt.

Over the next 25 years, if our GDP grows 75%, (3% annually), the projected spending for social security will grow by 127%, Medicaid spending by 224% and Medicare by 235%. These are not the only entitlement programs that the government has committed to, and if investment returns disappoint, the debts become greater as shown with Florida on the following page.

Hiding from and ignoring the problem of government’s unfunded liabilities will not make things easy for anyone, but addressing and solving the problem would be very bullish.

Ryan's Plan To Slash Debt Graph

YOU MADE A FOOL OF EVERYONE…

The 2005 Nobel Peace Prize winner and possible next President of Egypt, Mohamed ElBaradei says that “If Israel attacks Gaza, we would declare war against the Zionist regime”.

The US military now has a “responsibility to protect” the human rights of citizens from a country that sits with Cuba, on the United Nations Human Rights Council.

The “Supreme Leader” of Iran believes once Israel is destroyed, the last Islamic Messiah (the 12th Iman) will emerge from the well he fell into 1,000 years ago, and with Jesus, slay the infidels so the world will live happily ever after under Shari’ah law.

Worker productivity can be reduced if praying five times a day, but Shari’ah law also bans the earning or paying of interest. This makes attracting investment capital challenging, and very difficult if one wants to borrow money to grow a business, buy a home, or finance a stove.

Besides, any economic scenario not involving Israel is bullshit, not bullish.

Risky Assumptions Graph

YOU SAY YOU WANT A REVOLUTION…

The drive for individual freedom over state control is breaking out from Wisconsin to Cairo, from Syria to Tibet. Whether the outcome is a complete rejection of Western values remains to be seen.

The Jasmine Revolution is the biggest threat to Chinese regime since Tiananmen Square in 1989.

The Green Revolution in Iran would benefit from our “responsibility to protect” program if we decide to help the students finally over throw the mullahs.

The Muslim Brotherhood’s constitutional amendment, approved by 77% of Egyptian voters, bars women and Christians from the Presidency, and creates a board of Muslim clerics to oversee the government.

Clearing past limitations is disruptive but necessary if freedom for the individual is the goal. Societies that open their markets are better fed, better housed and provide better opportunities for upward mobility than societies that remain closed and bureaucratic. A modern, prosperous, and enlightened society, based upon entrepreneurship, and education is what people want, not submission to elites, church or state.

And money for people with minds that hate, or who carry pictures of Chairman Mao…not bullish.


TWELVE O’CLOCK A MEETING, ROUND THE TABLE, FOR A SÉANCE IN THE DARK…

  • Gold makes an all-time high in nominal terms at $1474 per ounce.

  • Crude oil climbs above $112, its highest level in 30 months.

  • Treasury Yields rise as bonds post three straight weeks of losses.

  • Portugal, Spain, and Italy along with major European banks need a government bailout.

  • Food inflation is up 40% in the U.S. while the housing market and wages continue to deflate.

  • China is importing our inflation from the West and continues to raise interest rates.

  • The curtain is starting to fall on California’s experiment in social welfare.

Warren Buffett says, “It won’t be the economy that will do in investors: It will be investors themselves”.

Investing on Wall Street is like swimming with sharks. The waters are treacherous. You must be careful what you do, and who you trust and it’s often best to avoid the bait that gets thrown your way since most is designed to hook and separate the investor from their wealth.

YOU KNOW I’D GIVE YOU EVERYTHING I’VE GOT FOR A LITTLE PEACE OF MIND…

Most do not have the proper training to understand the dynamics of the global economy or how to benefit from its activity. Many believe the stock market is manipulated because they don’t know the rules of the game or how it is played. Without the right perspective and experience on how to interpret situations and act accordingly, valuable resources and financial peace of mind could be lost.

October 19, 1987 was my first day with Merrill Lynch in Beverly Hills and my interest in understanding stocks and the financial markets has grown daily. While individual stocks are my expertise, I am versed in all investment products and my commitment to helping clients and friends reduce their costs and improve investment performance has never been greater.

As a Certified Financial Planner, I have a fiduciary responsibility to help clients achieve financial goals.
As a Registered Investment Advisor, I am totally independent and answer only to clients and regulators.

If there is any investment or financial concern that I could help with, please let me know, and thank you for your continued confidence and support.

 
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