Read Between the Hedges. The dramatic price rise in stocks around the world has stirred great debate whether economic recovery is occurring or should we brace for a double dip recession as many “Wall Street” experts pontificate on TV shows. The current high percentage of shares sold short tells us that the hedge fund community is betting on the double dip recession. As stock prices rise, the short positions lose money and cause pain for the hedge funds. Hedge funds operate as they wish with no financial regulation from the SEC. They reaped huge profits when the market fell in 2008-2009. Since March 9, 2009, the market continues to melt-up and the nay-sayers have lost money. With sub-one percent short-term interest rates, the climate for several quarters of sustainable economic growth is possible. Earnings will increase in the coming months as recovery points to better economic times for the foreseeable future.
Toyota Federal Reserve Policy. Ben Bernanke is driving a Toyota with the accelerator stuck on the floor board as he continues to keep short-term interest rates low and is using an array of monetary tools to implement money supply growth. He has done a good job in salvaging the large banks from complete meltdown experienced last year. Banks, by and large, were targeted by short-sellers floating nasty rumors as the SEC allowed shorting with no uptick rule for five years and the market believed that Financial Armageddon was here. The bond market now appears to be ripe for a bear market rally as the dollar’s recent strength is lessening the inflation picture for the next twelve to eighteen months. Record deficits of $1.5 to $2.0 trillion are accumulating in the Obama Treasury as Keynesian economic thought continues to dominate policy as long as Chinese and Japanese investors are willing to lend money to the US at such low interest rates. We believe the clock is ticking on this and ultimately will end the era of low interest rates.
Political Trade Winds. Political strains are building between the US and its Allies and strange innuendo is being exchanged with former enemies like Russia, Venezuela and other dictatorships. The Obama Administration will be tested soon as the world’s quest for energy will pit Argentina against the United Kingdom as oil finds off the Falkland Islands may lead to military actions. The US will be asked to support the UK but the Obama Administration is appearing neutral at this juncture. Of course, our troops being in Iraq and Afghanistan is old news with additional troops being added soon. The Obama group has offended Israel, France, Greece, Portugal, Spain and many other allies as he changes policy with these nations. Fear of an all out trade war still permeates the markets. Tariffs have been added on some Chinese imports of steel and other raw manufactured goods. Yet, our dysfunctional relationship with the Communist China continues to be alarming as our debt swells and our job losses remain high. The perception is China holds the trump card in the relationship as they continue to buy our debt. Google has been the only American company to take a stand against China as their censorship issues forced Google to relocate to Hong Kong. The Harvard crowd that runs our Treasury must believe that the Treasury can issue as many bonds as it wants as long as interest rates remain low.
Benevolent Dictators. Socializing medicine has made a quantum leap with the passage of ObamaCare that insures 30,000,000 uninsurable Americans. Health care rationing is around the corner and we expect doctors to retire early over dealing with the mess that will regulate one sixth of the US economy. Ultimately, individual income tax rates will rise and healthcare quality will be lessened. Marxism and Socialism imported from Copenhagen and Amsterdam is being embraced while Democratic and Capitalistic ideals are being abandoned. We should not forget that Obama runs General Motors, Chrysler, AIG, Fannie Mae and Freddie Mac. Hugo Chavez and Obama are starting to act very similar in their actions. Very scary time in American History!
More E, Less P. Developing investment strategy after the market run-up during the past 12 months becomes challenging at these levels. The E (earnings) in PE (price earnings ratio) must rise. The P rose last year. Earnings are improving pointing to worldwide economic recovery. Localized real estate markets are close to stabilizing. The price declines in recent months are slowing, but the bottom has not occurred. Recent government stimulus money has come to the aid of companies that lost money in 2009. Billions of tax refunds are being paid to select corporations including JP Morgan to the tune of $1.5 billion. Companies are doing better and corporate balance sheets look much improved over twenty four months ago.
Growth Curve. The interest spread between the one year US Treasury and the 30 year US Treasury bond is 420 basis points. The steep shape of the yield curve still predicts economic recovery with some inflation. The climate for capital formation remains positive pointing to higher equity values for the future. This is the primary reason the stock market has risen so much since last March. Only when the economic activity really heats up do we believe interest rates can actually rise. Japan could not raise interest rates in the 1990’s. We cannot raise rates at this juncture without having a very bad recession.
Continued Recovery. We believe that the market will provide positive returns for 2010 and long-term investors who were patient are reaping huge rewards despite the trading talk of the professional investment community. Tax rates remain favorable to long –term investors even though we expect more tinkering with the tax code.
Finding a Needle in a Haystack. Industry groups we continue to find value include the telecommunication, pharmaceuticals and energy. With the move from last year, it is extremely difficult to commit investments in the broad market without some reservation. Should the market correct ten to fifteen percent we would be more excited about new investment.
We continue to appreciate your confidence in us to manage your money. We do know that you have multiple options and alternatives regarding your investments.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027