“The U.S. economy, especially the private sector, is doing pretty well and looking optimistic,” John Augustine, chief market strategist for Fifth Third Bank, told an audience of the bank’s investment customers May 30 at the Toledo Club.

The current landscape of the U.S. economy is optimistic with consumption, investments and exports all being positive. The primary building blocks of the U.S. economy include housing starts, vehicle sales, construction, employment and exports, all of which are doing well.

“We hope you’re seeing it in your business. We need to get some of the balance sheets back into the economy,” Augustine told the audience of investors.

U.S. business has made an impressive rebound with corporate profits, capital expenditures, and capacity utilization all up. Business optimism, ranking higher than that of consumers’, had its highest reading since 2007.

U.S. stocks had the best performance in the first quarter of 2012 since 1998, Augustine reported. Stocks experienced a downturn in the second quarter due to the situation in Europe but are still providing an average annual yield of 3.94 percent.

John Augustine addresses Fifth Third Bank investors at Toledo Club. Toledo Free Press photo by Duane Ramsey

Dividends currently yield more income from stocks than bonds. The earnings yield of the Standard & Poor’s 500 and the 10-year treasury yield show the largest separation since the early 1950s.

“It’s a rare occurrence, even abnormal, in an unusual environment. When it splits, it will be more profitable for stocks than bonds. We have to be ready when those lines of separation come back together,” Augustine said.

Government spending is the big unknown, he said. The U.S. government is now 24 percent of the economy with expenditures of nearly $2.5 trillion dollars. Most of the industrialized world is in the same position, he indicated.

“Europe has big issues and we don’t know how it’s going to turn out. It’s too close to call. It’s in the politicians’ hands this summer,” Augustine said.

“China’s economy is slowing down while in transition from export-based to domestic. It will be a several-year process,” he said.

Only 35 percent of China’s economy is based on domestic consumption, compared to 70 percent in the U.S. The export numbers for the two countries are almost exactly opposite.

Investors can expect a third consecutive summer of heightened volatility and stock correction. However, the U.S. is outpacing what’s going on in the rest of the world, according to Augustine.

“We have time to get our fiscal affairs in order in the U.S. Next year, we’re going to be facing what we call the fiscal cliff or the single biggest risk to the economy,” Augustine said.

He explained that the government is considering sequestered spending cuts of $250 to $300 billion with 14 different tax provisions due to expire on Jan. 1.

The elections will impact the market by creating volatility but will not have the finality we want, Augustine said.

“America is voting to get the Congress it wants over the next few two-year elections. In the end, they will make the right decision no matter who wins,” he said.

Augustine told investors to focus on five factors leading up to the elections and end of 2012.

• Investors need to rebuild or rebalance their investment portfolios.
• Businesses should maintain or increase purchasing power.
• Stocks are the new bonds, with lower valuations and higher income yields.
• Maintain a representation of real assets in their portfolios, including commodities, gold and real estate, to offset currency concerns.
• Be dynamic in their investment management.

Investing is about allocating capital today to produce average annual returns that exceed the expected inflation rate of 3.5 percent to 4 percent in 2012 and build future purchasing power.

Augustine recommends that all businesses and investors should have a written strategic plan with growth initiatives for the next three to five years.

Augustine specializes in portfolio management for Fifth Third Bank with $25.6 billion in assets under management. He heads the Funds Management Team and is a member of the Investment Policy Committee and Markets Strategy Team at Fifth Third.

Tags: Duane Ramsey, Fifth Third Bank, investment strategy, John Augustine, U.S. economy

This entry was posted on Friday, June 1st, 2012 at 6:10 am and is filed under Community, Economy, Finances, Toledo Business Link.
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In articles and media appearances during the past several weeks, we’ve hinted that there are fundamental problems with the economy and the market. While we have often traced these back to poor policy, they are important to consider in and of themselves.

First and foremost is the lack of asset-derived income (e.g., interest, dividends) that we have covered in detail previously. It is still worth mentioning the lack of compensation to investors by corporations through transfer of earnings as interest payments or dividends. While many recognize the lack of interest paid on CDs and savings accounts, it’s important to note that portfolio earnings have not risen with stock prices during the past two years.

Many have argued for continued bullishness in the markets, which seems unlikely. These optimists have pointed to, among other things, below-average Price/Earnings ratios of stocks. While it is true that published P/Es have not been outlandish, these metrics are based on several assumptions — namely some presumed growth rate for earnings. Still more significant, however, is the lack of transfer of these earnings to investors.

Not only were these P/E ratios calculated weeks ago — before all the bad economic data we’ve seen recently — but they are predicated on those earnings being transferred to shareholders. After all, when investors buy shares of stock, what they’re really paying for is a share of a company’s future earnings. If companies have no intentions of sharing those earnings, they’re hardly worth as much to investors.

Another factor that had been driving stock and commodity prices higher was investors’ growing fears of inflation and their motivation to hold assets that might maintain their values through several rounds of quantitative easing.

It is true, unfortunately, that inflation has been a problem in the past two years. The problem, though, is not that we’ve had excess inflation, but that we haven’t had any at all (as defined by growth in money supply).

In fact, during the past two years we would have welcomed inflation. It would have been preferable to see money supply growth and have that money turning over in the economy. Perhaps then the U.S. economy might’ve been in as good a shape as everyone thought it was three months ago.

Instead, the majority of the past two years has brought debt deleveraging and negative money supply growth. Companies and individuals have been hoarding cash; though God knows what they’re doing with it, since it hasn’t been reflected in savings rates. Most likely they’ve been using it to pay down debt.

Now, after months of making our anti-inflation argument, it appears we’re on the verge of validation — from foodstuff, no less. For those who missed this riveting story, the United States this year has seen the  second-largest planting of corn crops in nearly 70 years. The news pushed down agricultural futures prices, and further declines are expected.

Oddly enough, corn prices were one factor we used repeatedly in arguing that inflation was nonexistent; pointing out that prices had risen not as a result of growth in money supply (which would have been inflationary), but due to simple lack of supply.

Echoes of this story can be heard elsewhere in the market — in gas prices, for instance. In just the past several weeks prices at the pump have fallen more than 10 percent. If prices of foodstuff continues to fall after gasoline, where, then, is the argument for inflation?

The answer, friends, is that there is no inflation — not now, anyway. Inflation might have actually worked to hold up prices for stocks and commodities in recent weeks. Instead we’ve seen a significant correction in stocks on a wave of poor economic data.

GDP growth, for instance, has slowed to a snail’s pace. The latest numbers released were recently revised down to 2.3 percent. If year-over-year GDP growth dips below 2 percent, history will show a recession is a near certainty.

A recession on the heels of the 2008 financial crisis and stock market collapse, housing market bubble burst, home construction drop-off — and in the midst of a European financial crisis spearheaded by Greek default and a slide in U.S. manufacturing and production, could be catastrophic. Certainly a little inflation over the past couple of years would’ve been preferable.

Dock David Treece is a discretionary money manager with Treece Investment Advisory Corp and is licensed with FINRA through Treece Financial Services Corp. He has appeared on CNBC and numerous radio programs, and also serves as editor of financial news site Green Faucet. The above information is the express opinion of Dock David Treece and should not be construed as investment advice or used without outside verification.

Tags: Dock David Treece, inflation, Treece, U.S. economy

This entry was posted on Thursday, July 14th, 2011 at 1:15 pm and is filed under Toledo Business Link, Treece Blog.
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