The week before last, the stock market was up every day and ended with a very good gain.  On Thursday of that week I appeared on Bloomberg TV’s Closing Bell segment on the floor of the New York Stock Exchange.  When I told the host, Matt Miller, that most of Foxhall’s ETF strategies were at least 60% in cash or in short-term U.S. treasury bonds he asked me if that was wise since the stock market was up so strongly that week.

I told him that I saw continued uncertainty in the stock market for at least the next six to eight weeks due to the political debt crisis in Europe.  I also told him the conservative allocation of the Foxhall ETF strategies could help in any future downturn or volatility in the stock market.

That certainly proved to be true last week!  The stock market corrected down sharply and our cash and U.S. treasury positions certainly helped cushion some of last week’s downturn.

The European Debt Drama should Continue For Another 6 to 8 Weeks

As I have mentioned in previous Global Outlooks there is general agreement on what steps Europe must take to solve the debt crisis caused by Greece, Italy, Spain, Portugal and Ireland. 

The problem is, the solution is politically unpopular with the Northern European countries that will have to essentially bail out some of their southern neighbors.  A number of politicians and political parties may lose their jobs and majorities over this issue.  And that is the reason this political drama is unfolding so slowly.

Part of the delay is that each of the 17 nations of the Euro Zone must have their parliaments approve the strategy.  This alone could take 6 to 8 weeks.

The U.S. Dollar vs. Gold

Last week, Europeans essentially saw a run on their banks as individuals and businesses sold the Euro and bought the U.S. Dollar.  That is why the dollar was so strong last week and gold prices fell.  Whenever the dollar is strong, gold tends to decline.

However, I believe this will only be temporary event in that as soon as the European politicians eventually solve their problem, all of those dollars could be sold and moved back into Euros.

What Is The Principal Driver Of This Stock Market Decline: Politics & Uncertainty!

Over the past two weeks I have been traveling to New York, Dallas and Houston.  I have been talking with bankers, stock market analysts, economists, businessmen, financial planners and clients.

In all of my meetings I have heard one common theme: Uncertainty—Lack Of Confidence—Lack Of Leadership!

I took notes and here are the comments that I heard over and over again:

• People have no confidence in either congress or the president to solve any of our problems or to do what’s right for the economy.

• One month after the debt ceiling debate between the president and congress the United States is facing the possibility of another government shutdown created by congress.  This spooked the stock market a month ago and it is spooking the stock market again right now.

• The business community uniformly has no confidence in the political leadership either here in the U.S. or in Europe.

• One banker told me that if you are a bank and you have money to lend, would you make a loan right now on a home when federal government regulators are talking about putting bankers in jail for what happened in the mortgage crisis three or four years ago.  What bankers are doing is just hunkering down and doing nothing.

• If you were a business, would you go out and take a loan to hire people and expand, when every day the president and congress are talking about expanding regulations and raising taxes on small businesses.  Most businesses still don’t know what the costs of the new health care law is going to do to their bottom line, but they know it will be negative.

• It is important that businesses know, with some certainty, what government tax policies and regulations are going to be in the future in order to plan, because hiring people is a long-term commitment.  It is this uncertainty that is hurting businesses the most.

• If you are an individual, would you go and spend money on a vacation, or buy a car or house, when you are not sure Washington is doing the right thing to help in job creation or you think your taxes will increase in the near future?

• Many businessmen believed this administration’s drive for new regulations is driving jobs overseas.

• There was a common view that everything that is done in Washington is viewed through the prism of whether it is good or bad for politics and their own re-elections in 2012, rather than whether it is good or bad for the economy now.

• Another view was; you probably won’t see unemployment come down until people start feeling better about the future of the economy.  And they are not going to feel better about the future economy until they see serious leadership from both the president and congress—rather than the petty political, partisan bickering, back biting and class warfare.  This is the reason people are so fed up with politicians.  Many people I spoke to feel the politicians are just making the economy worse.

• there was one common theme, it was lack of confidence in governement.

What Do We know About Stock Market Direction?

First, we know that despite a general slowing of growth around the world, global companies in the Dow and S&P 500 Indexes should expect 16% to 17% earnings growth this year and, even with the slowdown, probably about 15% growth in earnings next year.

Second, all things considered, that is a very healthy growth in earnings.  When you couple that earnings growth with S&P 500 corporations holding a record $2 trillion in cash on their balance sheet and the fact that they have historically low debt, the fundamentals of listed companies are extremely good.

Third, historically when politics or political issues, such as the European debt drama, are the prime drivers that are negatively impacting stock markets; once these political issues are resolved, the fear subsides and the markets tend to go up very quickly in a V-shaped pattern.

Looking ahead, I expect the economy will “muddle through” in the coming year andI believe that economic growth will improve from the 1% growth level experienced in the first half of 2011. There is one caveat, my view is predicated on the assumption—and it is a big one—that there is no major additional fallout from the European debt crisis.

What Is Foxhall Doing To Manage Risk?

Right now, most of our ETF strategies are at least 60% in cash and U.S. treasury bonds.  The reason for this is that individual ETFs have hit a pre-determined stop-loss trigger.  If a security is still being held in one of our Foxhall investment strategies it is because a stop-loss signal has not yet been triggered.

As regular readers of this Global Outlook know, besides stop-loss triggers, Foxhall also uses two sets of long-term technical indicators that when both trigger a sell signal, that lets us know the U.S. economy is entering into a long-term bear market.

So far, those two bear market indicators HAVE NOT signaled a long-term bear market.  However, they came very close to that signal last Thursday.

While I continue to believe that we are experiencing a severe correction within an overall long-term bull market, if our long-term bear market indicators hit their signals and let us know we are now in a long-term bear market, the next day Foxhall could move all of our client’s portfolios to cash and U.S. treasury bonds.

I hope that doesn’t happen, but if it does, we will move immediately to implement our long-term defensive strategy.

Until then…

Patience!

—Paul Dietrich

pdietrich@foxhallcapital.com

Disclosures: The opinions and portfolio information provided in the Foxhall Global Outlook are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security. Client accounts may differ from model allocations due to many reasons. All investment strategies offer the potential for loss as well as gain. Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing. Past performance is not a guarantee of future performance.

Foxhall Capital Management, Inc. is a registered investment adviser with the U.S. Securities and Ex‐change Commission (SEC) under the Investment Advisers Act of 1940. The firm is defined as the Foxhall Capital Global ETF, 401(k) and Stock Series divisions, which manage a variety of ETF, 401(k) and Stock strategies in bundled fee and nonbundled fee ac‐counts for primarily U.S. clients. The firm was redefined as of 12/1/08 due to the creation of the 401 (k) Series division. A complete list and description of all firm composites and their compliant presentations are available upon request.

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