Boy Named Sue. Spring has sprung. QE II is supplying ample reserves thanks to a ready, willing, and able Federal Reserve Chief. Ben Bernanke once said he would sprinkle money down from a helicopter if necessary to prevent a financial meltdown. We anticipate significant money supply growth in the coming months as we have entered the fifth month of continuous purchasing of U.S. Treasury bonds in the open market. High powered money should stave off any further recessionary fears. We do wonder where the missing John Maynard Keynes’ books are that told us how the Government Debt ($14 Trillion) actually gets paid? The stock market has risen commensurately since October, 2010. Unfortunately, very few jobs have been created during this period and housing remains anemic. Stagflation is coming as rising commodity prices across the board should make it into the local grocery store and noticed at the gas station.
The Ring of Fire. In early March, Japan suffered a 9.0 earthquake and a +50 foot tsunami wave leaving at least 20,000 dead. The Tokyo Stock Exchange experienced a significant drop as a result which affected prices even in New York. However, the rebuilding of Northern Japan should bode well for the economy as a result. We have all watched the terrible images of the quake’s aftermath with special attention to the nuclear power plant that could have melted down. Fortunately, the structure was built better than Chernobyl and Three Mile Island and apparently has been brought under control. Supply disruptions are now occurring for the automotive and computer businesses as components were manufactured in the Northern Japan region.
Sunday Morning Coming Down. Dictatorships and Monarchies are falling left and right in the Middle East and Northern African region as price spikes in basic commodities are causing unrest amongst the people that saw their purchasing power from their monthly transfer payments fall. Inflation in this region has hit consumers severely leading to rioting, looting and general discontent. Qaddafi and Muburak have either been ousted or close to being ousted in Libya and Egypt. Similar protests are occurring in Yemen, Bharain, Tunisia and Iran. Governments that control their national resources and do not promote free market principals are being challenged. The West has responded with the launching of missiles and airstrikes against Libya as Qaddafi was killing its own civilian population. Oil has spiked $10 a barrel since this all began.
Green, Green Grass of Home. Closer to home, we believe that Stagflation is going to permeate the U.S. economy for the coming months. Burgeoning U.S. debt, an accommodative Federal Reserve, and slow or no job growth points to a stagnating economy. Real estate remains in a funk though the foreclosure rate is slowing, but housing starts and new home sales remain very low. We see no immediate housing boom in any part of the country for the foreseeable future. Mortgages are available, but the lending standards remain the hurdle for lower income families.
Orange Blossom Special. The sheer wealth effect caused by the rise in adjusted reserves and the eventual money creation to follow has driven stock prices up since October 2010. The Dow Jones Industrial Average is trading almost double from its bottom in March 2009. The dramatic rise has caught many off guard. Our belief is that the low hanging fruit has been harvested from the market. If the bond market is in a bear market, then economically sensitive issues will continue to lead the market as long as the Federal Reserve keeps accommodating with easy money. We still like companies that benefit from rising commodity prices. We do caution that runaway energy prices at some point will put a ceiling on how much higher stock prices can rally. We do remain cautiously optimistic that normal banking and financial relationships have returned to the market providing a foundation for future economic growth.
I Walk the Line. Investment in fixed income securities is very difficult these days. Honestly, would you lend the U.S. Government at 3.5% for ten years? We believe that U.S. Treasury securities will fall in price in the coming months. Inflation is very cruel to fixed income securities eating at the returns reducing any attraction one may had enjoyed during falling inflation. We believe that the credit rating for U.S. Treasury bonds should be downgraded a notch or two by the rating agencies. The largest bond manager in the U.S., Pimco, recently announced it had sold all of its Treasury holdings for this reason. China and Japan are the major holders of U.S. Treasury bonds at this juncture and continue to buy more. Go figure! Only corporate bonds where cash flow from operations is improving should be considered at this juncture. Simultaneously, we like the preferred stocks of the same companies. State and local government bond investments are a minefield at this juncture. Tax collection is challenging for these issuers and may impair these bonds.
T is For Texas. Energy stocks should continue to lead the market in face of $105 oil. Special attention should be paid to the Baker Hughes RIG count as it rises above 2000, currently stands at 1,717. Saudi Arabia recently announced that it will aggressively bring on new RIGs in the effort to supply more crude to the market. We further believe that operating oil wells will literally spring up as a result of the recent spike in price. In the 1980-1982 window, the RIG count rose to over 7,200 worldwide and then the world was awash with oil. The price peaked at $80 briefly then fell to $6 per barrel in 1986. The civil unrest throughout the Middle East should prolong the rise in oil for a period of time.
Peace in the Valley. Our memory of 2008-2009 makes it difficult to believe the market can continue to rise from these levels. Corporate earnings are rising as the economy continues to improve. Success breeds success. We do believe that the economic recovery has begun in the U.S. and should spread around the world. The Wealth Effect from nearly a 100% increase in stock prices since March 2009 should translate in rising consumer spending in the coming months. Subsequently, we believe that long term investors stay invested in the market as the full effects of QE II ramp up economic activity through 2012 to 2013.
On February 14, 2011, we celebrated our fifteenth year of operation as a Registered Investment Advisor. We have enjoyed tremendous success in serving as your investment manager. Thank you for placing your confidence in us. Many of you have provided us with great introductions to prospective client relationships through the years which prove invaluable to our success. The business continues to evolve and remains very competitive. We remain committed to serving you and welcome your input on making our business better. We manage over $110 million in assets with clients throughout the United States. We remain a Securities and Exchange Commission registered firm and our current ADV II can be found on our website at www.robinsoninvestment.com.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027