Market Commentary for the week of January 23, 2012

Tick tock.
Time is a luxury many investors seem not willing to indulge.  A stop/start economy, seemingly moving valuations laterally, has them on the edge of their seat, hoping that something exciting happens to their net worth.

Ominously, however, the recently completed holiday season comes replete with its own set of hangovers.  Some economists now worry that households took on too much debt, and might cause spending in the ensuing months to contract.  More foreboding is that banks and brokerages are reporting that some cash for our holiday expenditures was withdrawn from retirement fund accounts.

As I look at economic data for the preceding quarters just ended, it seems that spending was out of balance with savings data and that manufacturing and sales was given a psychological boost by end-of-year expectations.  If business sees this as a harbinger of 2012 habits they might be severely disappointed.  All along, both on Wall Street and Main Street, unrealistic expectations and a shortened attention span have conspired to screw up logical results.

Despite reports of exuberance and hope from the holiday data, real savings rates are falling after a few years of frugality.

As a result, one might expect contractions in personal spending for 2012 particularly in, but not limited to, discretionary activities such as vacations, autos, restaurants, and entertainment.  Further, there is likely to be some negative spillover in necessities such as medicines, food, housing, and education.  Consumers, the engine of economic demand and expansion, are going to feel a little more pain this year, I believe.

And so, too, will big business and Wall Street.

Take the hit.

When the markets are surging ahead, investors tend to ignore the perils within fundamentals.  We saw a market surge in concert with a spending surge at the end of last year. Despite warnings to the contrary, consumers opened their pocketbooks.  People put aside their worries and said, “It will be alright.”

But woeful savings rates are not a mirage.  As people borrowed from their home equity, retirement plans, or savings they set in motion a cycle that will eventually come back, requiring repayment.  Even in a stagnating portfolio, margin debt, if incurred, must one day be paid back.

And although interest rates are hovering around historically low record levels, the “cost” of borrowing against one’s own funds is rising.  Banks aren’t charities, and have no desire to lend against your accounts/assets without profit.

The consequences might be ominous.  Food versus housing.  Tuition versus medicine.  Utilities versus transportation.  A significant number amongst us are making these choices.

Our “Hobson’s choice” flows over into the next generation.  A generation is now graduating without job offers and with large debt.  Momentum shifts can either be tectonic or rapid.  The steady drumbeat of recession-related data moves markets, ironically, with the pace of both at the same time.

As these new downtrends unfold they, too, take on a pulsebeat that inexorably moves the needle downward.  And as these trends develop they must be “resolved” before a secular bull market can gain traction.  Time, unfortunately, cannot be ignored as a factor in ameliorating what ails the markets.