• Stocks are ahead of themselves. The rapid increase in the stock market is not being supported by the underlying economic indicators.  Expect a pull back in the market soon.
  • Employers hired fewer workers in March than economists expected.  Non-farm Payrolls rose by 120,000, the smallest increase since October, and 40% less than the 200,000 consensus estimate.  Employers added just 0.09% more jobs for the month of March, for an annualized rate of growth of 1.09%.  Job growth in the 1% to 2% range is much less than the 2% to 4% rate observed in past economic recoveries, leading to the feeling that the current recovery is weak one.
  • The unemployment rate fell to 8.2%, down from 9.1% last August, but that was mainly due to people giving up their search for work.  Adding back those who want to work but have stopped looking, plus the people working only part-time but who want more work, the unemployment rate is 14.5%.  What little improvement there has been in unemployment rate may reflect an increasing proportion of low-paying positions, temporary jobs, and part-time work, as well as discouraged dropouts from the labor force no longer being counted as unemployed.  As I have been saying, “Consumer spending accounts for over 70 percent of total output in the U.S., but consumers remain under pressure due to unemployment, underemployment, slow wage growth, and steeply rising prices for essentials such as medical and gasoline.” The squeeze is on.
  • Federal Reserve Chairman Ben Bernanke has warned that the economy is not growing fast enough to sustain hiring gains.  The consensus of economists now appears to be moving toward a slowdown in GDP growth from 3% to 2%, leading stock analysts to reduce their earnings estimates.
  • European stocks have underperformed U.S. stocks over the past 6 weeks, as well as over the past 4 years:  relative strength turned down after peaking on 11/27/2007.  The official line is that financial stresses in Europe have lessened, but independent private analysts argue that the “solutions” are inadequate, and European debts are far too high to ever be paid.  And so, massive and widespread defaults are only a matter of time.  And not just defaults by the weak PIIGS (Portugal, Ireland, Italy, Greece, and Spain), but also defaults by the whole EU, as the contagion of financial failure of the PIIGS spreads to institutions in the stronger EU members who will lose money on defaulted PIIGS bonds they hold as assets. U.S. banks are also exposed to potential European contagion, and U.S. stocks may be vulnerable to downside risk whenever the European crisis flares up.
  • Be prepared for financial “accidents”, such as broker-dealer bankruptcies, like Lehman Brothers and MF Global.  Make sure that all your securities are held at SIPC insured brokerage firms only.  Move cash to FDIC insured U.S. bank accounts or to money market funds that only hold securities fully backed by the U.S. government.  This is no time to take any unnecessary risks.

Given the known serious and stubborn economic problems that defy good solutions, as well as major risks to the outlook ahead, we have been implementing a risk-adverse strategy for our trust assets accounts.

Reprinted with permission of Robert W. Colby Asset Management, Inc., 40 Wall Street, 28th Floor, New York, NY 10005.  2012.

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