Bull Durham. Even with a great start in stock price appreciation during the first quarter, dark clouds seem to never go away.  The list is long for all the issues affectionately referred to “the Wall of Worry.”  Cyprus, barely an economic powerhouse, has recently been front in center in Euro land as its banks have been closed for nearly two weeks as it struggles to pay debt to the ECB.  Many Russian Oligarchs have millions of Euros deposited in Cyprot banks and have not been able to withdraw for the last two weeks of the month.  Like MF Global, the Cyprus banks invested in Greek bonds which got whacked dropping half in value.  Whoops.  Of course on the brighter side of the pond, Washington’s $85 billion monthly drop in government spending has had positive effects on our U.S. dollar and stock market.  The first quarter has provided a year’s worth of returns during the first quarter.

Field of Dreams. Before we get carried away with irrational exuberance, we must quote our Japanese friends and state we are Burrish.  In the old days, the Japanese had trouble pronouncing R’s and L’s, so Burrish works for now.  The overall U.S. stock market has risen over 125% from the March 2009 lows.  Current valuations are pricing very good economic conditions for the next two years.  Economic recoveries usually are four to five years in succession and usually end when interest rates begin to rise.  Additional Quantitative Easing by the Federal Reserve suggests that policy makers remain fearful of Deflation and less worried about any collateral damage from its stimulative moves.  The sheer wealth effect of rising stock prices will find its way into the hands of all.  Yet, the critics of the QE III are more than likely not invested in U.S. stocks.

Bang the Drum Slowly. How will the Federal Reserve unwind its $3 trillion in bonds?  They will incentivize the market into financing the disposal of their positions through reverse repurchase agreements.  This will not occur until we experience massive inflation and a significant rise in interest rates.  Bond investors need to calculate their projections on inflation.  At 3% inflation, bond holders are losing their coupon, and some principal.  At 5% inflation, bond values and coupons are under water by 2 to 3% just on cash flow, and the market will begin adjusting bond values downward.  At 10% inflation, bond prices will drop 30 to 45% depending on maturity.  Once the world understands that the printing presses are running 24/7 and that rampant money supply growth is occurring then a forced liquidation of bonds will occur.  Buyer Beware.

Eight Men Out. Stock values have risen for a myriad of reasons.  Easy money is the primary reason.  The thawing of the housing market along with low mortgage rates has stemmed further price contractions in most major housing markets.  Foreclosures more recently slowed.  Strength among the housing starts certainly indicates that the economy is recovering, though at a modest level.  We may never see housing starts at the 2005-2007 level of 1.4 million per year.  Current housing starts are clipping along just shy of 1.0 million on an annual basis.  Recent employment data suggests that hiring is occurring.  Yet, the real unemployment remains very high.  Are we in stagflation?

The Pride of the Yankees. For the past twelve months an ounce of Gold has dropped 4.6% and oil has dropped 7.8%.  With the amount of stimulus being provided by all the world banks, logic would point to higher prices of both commodities.  The Great Inflation has been put on hold for another year or two as the world seems adequately supplied with oil.  Gold prices have moved down since the Commodity Futures Trade Commission raised margin requirements on investors reducing speculative buying of the precious metal.  More recently, world central banks were net buyers of gold during the first quarter of 2013, though the price was down.  We believe that gold prices will rebound during the second half of 2013.

The Bad News Bears. We are now in the fourth year of a major price appreciation in stocks. We believe investors should be more cautious in the coming months.  The Great Rotation is the main reason to stay invested in stocks.  Switching from bonds to stocks would make the most logical strategy for large institutional investors.  If you thought bond values were going to drop substantially, then unloading longer term fixed income for high dividend paying stocks would be the logical investment choice.  However, these stocks have already moved up in price.  More importantly, once bond yields begin rising, we believe yields will also rise amongst stocks.  PE ratios will also drop.

The Natural. Investment strategy should continue to focus on economically sensitive issues.  In order for interest rates to rise, we believe that the worldwide economy must roar back with significant growth.  Our current U.S. Treasury yield curve continues to predict economic recovery.  Not only do investors benefit from the wealth effect of low interest rates, but corporations are financing transactions at historically low interest rates.  Availability of capital and its formation remain great.  Therefore, we believe that industrial companies will continue to do well in the foreseeable future.  Aging demographics continue to favor health care companies.  We do believe that rising inflation expectations will favor all commodity based industries including energy and gold miners.  Ultimately, rising interest rates should impede the performance of financial companies.  However, the rise in real estate values should offset the losses of fixed income portfolios for these companies.

A League of Their Own. In a rising interest rate environment, we would sell most fixed income securities and bond mutual funds.  Only bonds yielding less than five years should be considered.  We believe that all money market and bond funds should be thoroughly research prior to making investments in these funds.  Once the rising interest rate train leaves the station, many investors will lose some principal in their fixed income investments.  Rolling Treasury bill portfolios will offer the only safe haven for fixed income investors.

The Sandlot. Investors who remained patient during the past six years have been handsomely rewarded.  At the current juncture, the reasons for staying invested remain positive as many retail investors have large sums of money sitting idle.  The quandary we believe warrants that large holders of cash should dollar cost average in stocks.  Regular monthly contributions into stocks would make more sense than dumping money into stocks all at once.  Caution should be observed as prices have reached all-time highs for many of the stock indices.

Major League. We look forward to serving as your investment manager.  We consider it an honor and privilege to manage your assets.

Titles from http://www.baseball-almanac.com/moviebat.shtml, top ten baseball movies of all time.)

Russell L. Robinson

President

Robinson Investment Group

5301 Virginia Way, Suite 150

Brentwood, Tennessee  37027

615-242-3447