Current Investment Perspectives.
Climbing the Great Wall of Chinese Worry. The economy is recovering. Although, the U.S. recovery is digesting modest housing data and $4.00 gasoline, recent employment data suggests that corporations are hiring and that industrial companies are experiencing increases in revenues and profits. Recently testimony by Ben Bernanke suggests that stagflationary forces keep a lid on overwhelming optimism that we are in full-blown economic recovery. Europe is still slow if not experiencing recession. Chinese GDP growth slowed to 7.5% for February which should quell recession talk in South East Asia. The Federal Reserve continues to grow money supply at a healthy 10% annual rate supporting the record first quarter ascension of all stock indices.
Bernanke’s Incredible Money Making Machine. Bernanke and the Federal Reserve continue to sow more seeds of growth as money supply continues to grow at 10% on an annualized basis. Operation Twist remains the monetary policy de jour as Fed sells short term securities and purchases longer term Treasuries. The possibility remains for another round of stimulus in the form of QE III. Worldwide monetary policy remains very favorable for economic growth as world central bankers continue with easy money. Ultimately, inflation does return although recovery is very modest.
Nothing from Nothing Leaves Nothing. The fixed income market remains unattractive for investment as rates remain low and should rise as a result of current market prospects. We would definitely avoid fixed income securities with maturities over five years. Bond prices will fall dramatically at some point in the future. We do not know when, but believe the larger purchasers of bonds will grow impatient and begin to unload these securities. Yields have already risen since the first of the year, with significant potential to rise further. Many corporations have taken advantage and issued bonds at these historical low yields. The world is awash with liquidity.
Even Bigger than Too Big to Fail. The U.S. banking industry has stabilized based on recent bank stress tests conducted by the FDIC and the Federal Reserve. We are not investors in banks as net interest margins remain narrow limiting bank profitability. The large amount of deposits in banks remains a money loser for banks. We are happy that banks are doing better, but would avoid investment in financial institutions.
Corporate Earnings Improving. We remain optimistic about industrial based companies. The low interest rate environment and easy money continues to forecast rising economic growth for the next twelve months. Corporate earnings have been improving. We anticipate that corporate revenues should improve over the same time period. Companies have done a reasonably good job of cutting costs and managing earnings during the past twelve months and now have wiggle room to take some risk in the form of hiring and/or strategic merger and acquisition activity. The past twelve months many companies have been divesting less profitable businesses in order to focus on higher profit margin businesses.
Lull in the Storm. Commodity prices remain lower more recently as the world economic growth slowed over the past twelve months particularly in China and Europe. Recent moves in China and Brazil to lower interest rates and reserve requirements should accelerate economic growth during the next twelve to eighteen months. Also, the lower coal, natural gas, copper prices have given companies a boost in reduced costs for operations. Petroleum prices have recently risen but leading industry analysts are now backing off forecasting higher prices at the moment. We anticipate some relief for higher fuel prices during the second and third quarter just in time for the presidential election in November. However, longer term we see no end in sight for higher energy prices after the election.
As January Goes, So Goes the Year. The overall stock market should continue to attract new investors as alternatives to fixed income investments remain unattractive for investment. Dividend paying stocks have attracted some new players including aggressive investors like hedge funds. We have been in these stocks for a while and warn our investors that any meaningful inflation will affect returns for these alongside bonds. During the late 1970’s dividend yields for the Dow Jones Industrial Average rose as bond prices fell. Price earnings ratios dropped. We believe that corporate streamlining will dominate if inflation rises over the next several years.
Competitive Advantage. The investing world has changed dramatically over the past ten years as globalization is here to stay. The technology world is dominated by Southeast Asia. Companies have moved 8 million jobs in the U.S. to that region of the world because of the significant labor advantages. The U.S. and Europe remain stagnate because the Social welfare pays people not to work while many of the Chinese desperately want to work, at any price. We believe that many U.S. companies who take advantage of the global manufacturing channels remain reasonably good investments.
We are honored to serve as your investment manager. The markets have responded favorably during the first quarter. We believe the interest rate structure continues to favor equity investments. Long term investors always fair better than short-term investors. We continue to look long term and believe the next several years will reward investors.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tenneseee 37027