Can the U.S. Economy Muddle Through? 2/9/13

Talk by Dennis Stearns, CFP, Stearns Financial Group, Chapel Hill, NC

My Rating: A

Dennis Stearns presents his data, charts and ideas in a very well thought out manner, and I enjoyed his talk immensely. The last time I heard him was in 2012.

Dennis started out by first summarizing 2012 and asking “Is it a sugar high or is this a lasting Recovery? Bonds are no longer the chocolate and vanilla category but there are Tutti Frutti, Rocky Mountain and many other flavors; and bonds hit outside the park last year with 10-15% returns”. He is now more cautious on bonds and exited positions, and selling bonds would be the order. It was a wake up call for me. Despite the down signals on my TLT and TIPS charts, I have bond positions as a hedge in my 401K. I will close those out soon.

Dennis echoed the U.S. energy independence theme that he mentioned in 2012, same one he told us at his last presentation in 2012. The media and markets are underestimating the U.S. energy trends. Natural gas and oil explorations will make the U.S. the largest energy producer in a few years, surpassing Saudi Arabia and enabling the aggregate GDP to jump another 1 ½%.

Dennis discussed the US debt issue and expects it to stay in the 72% to GDP range, rising a little more due to the increase in baby boomers Medicare participation; but capping out and slowly reducing to the 60's over the years. The high cost of Medicare is the cost of tests and care for seniors in their last 6 months. There are major innovations in the works to enable more rapid and faster tests. He does not believe the US is in a decline like the Roman Empire.

The consumer balance sheet is also improving. The household debt service in 2001 was 14.1% and in 4Q12 has dropped to 10.4%. Credit card companies are extending credits again and the home markets in certain areas are improving. Housing is bubbling, although somewhat unevenly. Well earning young professionals who are making money in the 6 figures are buying higher priced homes. The rebound in housing may offset the fiscal drag. Confidence is going up and we are more likely to see an upside surprise.

Bond markets will not yield a favorable yield in 2013 and as mentioned before, Dennis said they have exited their positions. He likes to leave the party early when it is going real strong.  He feels the same way about TIP, inflation adjusted bonds. I am attaching a chart on TIP showing my own exit signal on it from technical analysis.

He pointed out that the media has now started calling out many black swan events and he refers to them as black ducks instead. When he sees the media waving white ducks, that would be a good time to exit.

Emerging market funds, and US high quality stocks are likely to provide the best return possibilities in 2013.  Stocks like PEP, UT, JNJ, ABT and also KO, PG. Stocks like HD have already had a great run up and I got the impression he liked it but better to let it pullback first. The US small stocks return will likely be subdued. He does not like to buy individual stocks in emerging markets and opts for funds. I am attaching a chart on EEM (Emerging markets ETF) using my trading system on it. After a nice run up, it just generated a down signal, and I will hold back entering it as of this writing.

“Things are getting better and not worse, although there is inflationary risk”.

“We like to buy the Ugly Duckling”

Dennis believes in the US and innovation. Although some manufacturing has been shipped overseas, manufacturing is moving back. Advanced Manufacturing is experiencing a powerful resurgence in the U.S. that could, combined with energy independence scenarios help revitalize other parts of our economy and kick off the “Deployment Phase” highlighted in the 2012 edition of Stearns Financial Trends”.

In summary, plan on a modest upside year but keep the hedges in place. 
What I wonder is how much of that upside has already taken place in the first month of this year?