Paul Dietrich's Global Investing Trends Report

The Current Status of This Summerís Stock Market Correction

Posted September 6, 2011 · 0 Comments


In my May and June GLOBAL OUTLOOK newsletters I warned everyone that the stock market 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.

As I have mentioned before, in my opinion everything that has caused this summer’s stock market correction has been the result of global political issues—not company fundamentals.  We know from history that when the stock market declines because of A REACTION TO POLITICAL ISSUES, the stock market usually bounces back very quickly once those political issues are resolved.

THIS STOCK MARKET CORRECTION SHOULD BE NO DIFFERENT!  Unfortunately, I believe we will continue to see volatility in the stock market while European governments come up with a more permanent solution to their debt and growth crisis.

THE EUROPEANS KNOW WHAT THEY HAVE TO DO TO RESOLVE THIS CRISIS, but like U.S. politicians, they will only act at the last minute after the crisis forces them to act.  Many analysts believe Europe is at that crisis point right now.  THEY MUST ACT WITHIN THE NEXT FEW WEEKS TO SOLVE THIS CRISIS.  As I mentioned above, they know what they need to do, but it will be very politically painful.

So for the next few weeks, we should see a lot of ups and downs in the stock market,  so tighten your seat belts.  It should be a bumpy and volatile few weeks as markets are held hostage to policy developments in Europe.

Once this European debt crisis is finally resolved around late September or October, we should see a strong market rebound for at least the next six months thereafter.


We believe the best way to navigate stock market corrections are with FOXHALL’S DUAL INVESTMENT STRATEGY.  IT keeps investors largely invested during long-term bull markets and once a long-term bear market is identified, moves investors out of stocks and into cash, treasury bonds or other investments that attempt to protect principal.

Second, we believe that every portfolio should have a significant exposure to commodity and commodity producers like oil, gold and other precious metals, in order to try and protect clients against unforeseen and unpredictable  “Black Swan” disasters and attempt to  protect the purchasing power of client accounts against the ravages of inflation.

FOXHALL uses two technical indicators to signal that the stock market is entering a long-term bear market.  When that signal is triggered, Foxhall immediately moves our clients portfolios up to 100% in cash or U.S. treasury bonds.

I want to make it clear that our “FOXHALL BEAR MARKET SIGNALS” have not triggered during this correction and so we feel that WE HAVE NOT ENTERED INTO A LONG-TERM BEAR MARKET.  In my opinion. This is still a correction within a LONG-TERM BULL MARKET.


However, because a number of the EXCHANGE TRADED FUNDS (ETFs) that were invested in FOXHALL ETF STRATEGIES hit stop-loss signals several weeks ago, these positions were sold and most ETF portfolios currently maintain a minimum 50% in cash.  This is part of the FOXHALL risk management strategy for ETF portfolios.

As soon as the stock market settles down and resumes a sustained upward trend WE WILL VERY QUICKLY GET BACK INTO THE STOCK MARKET.

FOXHALL, has also been able to take advantage of this correction in that over two months ago, after many commodity prices dropped, FOXHALL increased the commodity exposure in our ETF portfolios from 10% to 16% of all equity allocations.

We believe this change will help our clients navigate future corrections with a higher margin of safety in our sometimes fragile and uncertain economy.



FOXHALL uses a fundamental screen that looks for stocks with low Price Earnings Ratios, high returns on equity and generate high returns of free cash flow.  Because of these strong fundamentals, we maintain a wider downside range for our stop-loss targets.

While stocks are almost always more volatile than ETFs, FOXHALL has found that if you set the stop-loss for stocks too tightly, the stock goes down and then bounces right back up again after you have sold.  Since stocks with these fundamentals tend to bounce back more quickly than the general market during upswings, we have found that it pays to stay invested in these stocks until they hit their stop-loss signal.


I know I have written about this before, but it helps to remember some stock market history. 

Historically most economic growth and stock market growth takes place from late October to late the next April.

During the summer months and early fall from May to October, the economy usually slows down, as the weather gets warmer, people take their vacations and attend baseball games.  Don’t ask me why this happens, but this has been a prominent trend for the past 60 years.

One of the characteristics of the “MAY TO OCTOBER TREND” is that the stock market tends to have severe swings both up and down during this period—and that is what we are seeing right now.


Warren Buffett has often said that it only takes two things to succeed as an investor—first having a reasonable investment strategy and second, sticking to it—and it’s the sticking to it part that many investors struggle with—especially during these severe swings during the MAY TO OCTOBER TREND.


In an upcoming GLOBAL OUTLOOK I will explain the political issues driving the European debt crisis, what the solution to the crisis is, and why that solution will be very bitter medicine for Northern European countries.  But in the end, they have no choice but to take the medicine and solve the debt crisis.

This is primarily a European banking crisis and, in the end, should have little effect on American companies or the U.S. economy.  American banks have very little exposure to Greek, Italian, Spanish, Portuguese or Irish debt.  The little exposure they have to European banks has already been hedged.

It is sometimes difficult to explain to people why all this affects our U.S. stock market, but we now live in a world where most global political issues can and do affect our U.S. stock markets even if the political issues have little or no affect on the American companies or the U.S. economy.

That is why it is so important for investors to be able to differentiate between short-term political issues that are negatively affecting the stock market and the underlying fundamentals of a particular stock.


While it is true we have the SAME high unemployment that we have had since 2009.  We also have the SAME slow growing economy that we have had since 2009.  IN FACT, VERY LITTLE HAS ACTUALLY CHANGED ECONOMICALLY OVER THE PAST THREE YEARS.

HOWEVER, THE UNDERLYING FUNDAMENTALS OF U.S. COMPANIES HAVE NEVER BEEN STRONGER.  And if you want to understand the long-term direction of the stock market, an investor needs to focus on a company’s fundamentals and earnings.  It is these fundamentals and global earnings that should drive the stock market higher after these political issues are settled in the next month or so.  Here is what the long-term fundamentals of the stock market tell us now:

1.    U.S. 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 $1.1 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.

2.    U.S. state and local tax revenue rose 4.7% in the first quarter, which is the sixth straight quarter of growth and a good sign the U.S. economy is mending.

3.    Long-term economic trends are positive and solidly in place.  Yes, the U.S. economic recovery is mediocre but the U.S. economy is still growing and there is little chance, short of some unforeseen economic disaster, that could cause the U.S. to slip back into a double-dip recession.

4.    Asian economies are slowing and THIS IS VERY GOOD NEWS.  This means that Asian Central Bank policies are working.  Asian Central Banks have been raising interest rates for over a year in an effort to slow Asia’s unsustainable growth rates to a more sustainable 6% to 9% growth rate.  There policies are working and many Central Banks are signaling that they will stop raising rates over the coming months.  When this happens, I believe Asian and emerging stock markets will take off.

5.    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 consumption of 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.


I have cited some of these points in previous GLOBAL OUTLOOKS, but I want to reiterate that 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.

I BELIEVE WE HAVE ALREADY HIT BOTTOM IN TERMS OF CONSUMER SPENDING and over the next few months we will see consumer growth moving up over the next year.

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


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 so called “experts.”


In almost 25 years of investing, I have seen almost forty stock market corrections, but only three long-term bear markets.


Because of political issues in Europe and here in the United States, I believe we are seeing one of the most “OVER-SOLD STOCK MARKETS” anyone has witnessed since early 2003 and March of 2009.  At that time, stock markets shot up after those “over-sold stock markets” were recognized.

As an investor tries to distinguish between real market fundamentals and “political noise,” it is ALWAYS a mistake to make stock market buying or selling decisions based on emotion or “political noise.”  IT IS ALMOST ALWAYS A PRESCRIPTION FOR LOSING MONEY.

While I don’t have a crystal ball, but given the oversold nature of the current U.S. stock market, the strong fundamentals of U.S. companies and an upswing in consumer spending, I do believe we will see the recovery start within the next month or two.


—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.

Foxhall Capital Management, Inc. claims compliance with the Global Investment Performance Standards (GIPS®). Foxhall Capital Management has been GIPS verified for the periods 12/31/99 –12/31/08 by Beacon Verification Services. The ETF Series composites have received a performance examination for the period since inception through December 31, 2008. A copy of the verification report is 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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