Paul Dietrich's Global Investing Trends Report

Just Another Stock Market Correction

Posted August 5, 2011 · 11 Comments

Yesterday's stock market decline sent the Dow Jones Industrial Average and the S&P 500 stock index down more than 10% from their May intra-day highs.


While there was no fundamental reason for the drop or any single catalyst for the downdraft, it seemed to reflect multiple concerns that have mounted over the past month and came to a head this week.


Analyst seem to agree that the decline in the stock market has more to do with a lack of confidence in politicians in the U.S. and Europe, than in the fundamentals of companies trading on the stock market.  This is more of a political crisis of confidence than anything else.


I Told You This Would Be A Volatile Summer!


In my May and June Global Outlook newsletters I warned everyone that this summer would remain volatile through the early fall.  I said we would see multiple stock market corrections followed by recoveries.  And that is exactly how it has played out.


This is simply a repeat of last summer in 2010.  In July 2010 we had a stock market correction of more than 13%.  The stock market completely recovered in a couple of months and we ended the year with very good gains in the stock market.


This stock market correction should be no different!  I expect we may continue to see volatility over the next week or so, but if history is any guide, we should see a strong market rebound in the next couple of weeks.


The stock market is completely oversold on both a technical and fundamental basis and I will talk more about that later in this newsletter.


A recap of April-May 2011’s Correction


As you may remember we had a major stock market correction 3½ months ago in late April and early May.  But a few weeks later in late May, the stock market had completely recovered and hit new intra-day highs.


I believe the same thing will happen this time.  We should see the stock market recover within the next few weeks.


This is a great buying opportunity and Foxhall’s   process has identified some positions that will be sold.  The cash from those sales will allow us to take full advantage of this situation over the next few weeks.

The ETF Growth strategy will hold about 25% cash, Pacific Rim/Emerging Markets 39% cash and Commodities/Hard Assets 17% cash. Due to their nature, the Variable Series strategies and Stock Series strategies remain fully invested.



This Market Correction Is Largely Over Political Concerns


When the stock market declines because of a reaction to political issues, the stock market usually bounces back very quickly.


The first reason for the decline most cited by analysts is the lingering worries over the U.S. debt ceiling crisis, settled this week in a last-minute fix to raise the country's debt limit. 


For the last few weeks, our courageous, noble and hard working Washington politicians intentionally took the nation to the brink of economic disaster.  Unfortunately, in the process, they made the U.S. the laughing stock of the rest of the world.  Foreign press reports repeatedly called our government officials “clowns,” “dysfunctional adolescents” and worse.


Are The New Spending Cuts Real?


But the really important question is what did our heroic congressmen and senators accomplish by playing “chicken” with the U.S. and global economy.  The answer is, nothing of substance!


They agreed to a measly $2.1 trillion in spending cuts over the next 10 years.  Former Treasury Secretary and Obama economics advisor, Larry Summers, said in a report by Reuters that most of the cuts were blue smoke and mirrors—in other words, they weren’t real.  He thought only about $1 trillion were real cuts and for various reasons I won’t recount here, he thought these cuts would not, in the end, result in any real deficit reductions over the next decade.


But even if he is wrong, over ten years those spending reductions only add up to $210 billion in cuts each year.  We now have a $1.5 trillion deficit this year and will have a similar deficit for each of the next ten years.  That means we will still have to print at least $1.3 trillion dollars every year to cover the deficit.  Think how much that will add to the national debt, on a compounded basis, over the next decade.


No wonder disapproval of Congress rose to an all-time high this week.  According a New York Times/CBS News public opinion poll published on Thursday, a record 82 percent of Americans now say they disapprove of the way Congress is doing its job, compared with 14 percent who approve.


Warren Buffett, our nation’s greatest investor, has said time and time again that in the history of world economics, if a government continues to print money year after year to cover government expenditures that are not paid for by tax revenues, you will create inflation.


Europe Has A Serious Debt Crisis!


The second general concern that analysts most cite for the stock market drop is Europe.  European politicians are continuing to grapple with a widening debt crisis, which started in Greece and is now spreading to Italy and Spain.  An earlier bailout of Greece now appears insufficient.  There are growing concerns about European banks and their heavy investments in the debt of these countries with big fiscal problems.


Is There A Legitimate Concern That The Global Economy Is Slowing?


Government statistics suggest that the U.S and Global Economy are slowing.  The big question is, how much longer can investors count on strong corporate earnings to continue their growth.


Fears about a global slowdown worry many investors because of a number of recently released weak economic reports.


Recent economic revisions shows that the U.S. Gross Domestic Product (GDP) and the U.S. economic recovery have been more fragile than originally thought.  The Commerce Department now says GDP rose only 0.4% in the first quarter of 2011 and 1.3% in the second quarter.  That means that the United States is growing at an annualized rate of about 1.7% so far this year.


The Commerce Department also announced that personal spending fell 0.2 percent in June.


The problem is, U.S. growth was probably always this weak; it was just masked by the artificial stimulus of the Federal Reserves’ stimulus programs.  This is probably nothing new, but now we are receiving accurate figures, without the government’s artificial manipulation and distortion.


The U.S. Economy May Already Be Recovering


I do not believe the U.S. economy is going into a double-dip recession and I further believe we are in the process of an economic recovery over the next two quarters.


Government statistical reports show what has happened in the past, but they do not necessarily reflect the future.


Here Are My Reasons For Believing The Economy Is Turning Up!


Contrary to recent government reports, I think we are seeing an upswing in consumer spending.  Here’s why:


  • Profit from General Motors’ recent sales in the second quarter of 2011 in the U.S. rose over 37% to $2.2 billion from $1.6 billion. Overall U.S. sales rose 12% from the previous year.


  • The 25 major retailers tracked by Thomson Reuters reported 4.4% growth in July same-store sales.


  • Target posted a 4.1% rise in same-store sales last quarter after analysts only expected a gain of 3.7%.


  • Costco said its same-store sales climbed 10% last month, while Limited said sales rose 6%.


  • MasterCard’s growth in U.S. sales volume was up 9.9% last quarter.


  • Visa's credit transactions for the second quarter totaled a 14% increase over the prior year.


  • Sales tax revenue from state and local governments rose 4.7% in the first quarter of this year, according to U.S. Census data.  I use sales tax revenue growth as a leading economic indicator of the overall direction of consumer spending.


I believe this data is more indicative of a rebound in consumer spending than official government statistics.  I also believe these reports may be the leading economic indicators pointing to an upturn in consumer spending and hardly reflect the slowdown being predicted by many “talking heads” on financial television.


Forbes Article


On Friday, July 25, 2011 Forbes Magazine published an article “Five Fundamentals Driving Current Stock Market” that outlined my views on why the stock market was is the process of turning around (  I made the following points in the article:

US company fundamentals are improving in almost every area. Manufacturing is rebounding at a 15% annualized rate over the past 3 months.  S&P 500 companies are now holding a record $2 trillion in cash. This cash has the potential to add a lot of momentum to the markets and to the economy in the form of increased dividends, share buybacks, mergers and acquisitions activity and capital expenditures.


Profits for S&P 500 companies have exceeded analyst’s projections by over 80% for the second quarter of 2011 and overall earnings for the quarter are up almost 20%.  Even today, analysts have never been more certain that the stock market will rally through the end of this year.  According to a survey released today by Bloomberg, chief strategists at 13 banks from Barclays to UBS see the S&P 500 Index surging 17 percent through Dec. 31st.  This was the average estimate in the Bloomberg survey.  Their projections that the S&P 500 Index will reach 1,401 by the end of 2011 hasn’t budged, even though many investors still have concerns that U.S. growth is slowing.  A year ago, strategists also remained bullish after an almost 14 percent drop in the stock market, and this proved prescient as the S&P 500 Index rallied 20% from its August 2010 low.


The primary reason most analysts do not think that a slowdown in U.S. growth will slow earnings growth is that the S&P 500 Index and the Dow have now effectively decoupled from the underlying U.S. economy.  Currently about 50% of revenues and profits of all the S&P 500 companies come from overseas, mainly Asia and other emerging markets.  In the end, investors value companies based on their revenue and earnings.  The U.S. stock market now reflects the revenues and earnings of U.S. companies selling globally and NO LONGER specifically represents the underlying U.S. economy.  Most major companies are still beating earnings and profit estimates and that is the best signal of all for a long-term rising stock market. 


Even though the US economic recovery is mediocre, the US economy is still growing YTD at a rate of 1.7% and this will probably accelerate through the end of the year to over 2%.  This is not great growth, but it is growth, and I do not believe, short of some unforeseen economic disaster, that the U.S. will slip into a double-dip recession.


Some analysts worry about a slowdown in China and other Asian and emerging markets economies.  When the press cites slowing growth in China and other emerging markets this is somewhat misleading and should be put in some historical perspective.  Asian and emerging central banks have been raising interest rates in order to slow inflation and unsustainable growth.  Late last year, China’s growth started to accelerate to “bubble-like growth” of about 12%.  China’s central bank started to aggressively raise rates and change bank lending policies to slow growth to the current 9.3% to 9.5% rate.  They were successful and investors should be happy that their policies worked.  China’s average growth over the past 5 years has been in the mid 9% range, where it is now.  I do not believe that slowing China’s growth from an unsustainable 12% to where it was last year and, on average, where it was over the past 5 years, is a real “slowing down” of growth.  It is simply keeping China’s growth rate at the robust rate it has been over the past 5-years.


Commodities are still in a 10-year to 15-year long-term bull market.  Even if underlying economies like China are trying to reduce their growth rate from 12% to 9%, that doesn’t necessarily signal a slow down in their buying commodities.  The vast majority of commodity buying is by Asian governments as they are building long-term infrastructure projects like super highways, power plants, airports and new electrical grids.  These projects also provide jobs, so they are unlikely to slow even if the overall local private sector economy is slowing.  Many Asian governments have large surpluses to pay for these massive infrastructure projects.  I believe commodities will continue to be in demand and continue to rise over the long-term.


Conclusion—We Are Witnessing A Bottoming In The Economy


The stock market may go down today and we may see volatility in the market over the next couple of months, but the good news is we are witnessing a bottoming in the overall economy.


This drop in the stock market is just what we needed to clean the slate.  I believe over the next month or two we will have completely recovered from this stock market decline and will then be reaching new highs.


After almost 25 years as an investment manager, I have learned that politics, political concerns, terrorism, and natural disasters do affect the stock market for short periods of time.  But in the end, they are just “background noise,” and after the drama plays out, real investors come back to focusing on the fundamentals of the stock market.


If an investor really wants to understand the immutable long-term trends of the stock market, all they have to do is focus on earnings.


In the end, it always comes back to an investor deciding what multiple of earnings he or she is willing to pay for a particular stock.  It is, as simple as that.  It is that process that drives the stock market either up or down.


I, too, would be bearish if I saw earnings starting to broadly decline globally.  But that is not the world we live in today.


The general consensus for the S&P 500 companies is that their profits should grow 18% through 2011.


That is why I believe that by New Year’s Eve 2011 we will all be celebrating a double-digit gain in the stock market.  I personally think this year’s stock market gain will be at least 15% for the year.  We’ll see if I am right.


Until then,





—Paul Dietrich


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 non‐bundled fee accounts 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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About Paul Dietrich
Paul Dietrich is the Chairman, CEO and Co-Chief Investment Officer of Foxhall Capital Management, Inc. (Foxhall).  Foxhall currently manages investments for individuals, mutual funds and private institutions throughout the United States. Paul Dietrich is also a portfolio manager to a publicly traded mutual fund, the Foxhall Global Trends Fund.
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