Cold Weather. Spring has been temporarily put on hold as we wait for the five Great Lakes to Melt! For the first time in 25 years, 95% of the five Great Lakes were frozen with estimates of up to 2 feet of ice. Record snows through the upper Mid-West and Northeast have certainly reversed the luxury the recent milder winters have created over the past twenty years for the North American Continent. The Polar Vortex in 2014 has dominated weather patterns and still has a grip on much of the upper Mid-West. Already, economic activity has been impacted as many spring-time activities have been put on hold affecting retail sales and housing data. We expect that economic activity has been reduced especially in the Northeast.
Cold War Redux. During the quarter on March 1, Russia, under former KGB Head Vladimir Putin, seized control of Southern Ukraine/Crimea and is on the brink of taking it completely over. The Ukrainian President has been ousted and fled to Russia, though he insists he is still the President. Unfortunately, he and his brother have misplaced some $30 billion of Ukrainian funds through an intricate international banking scheme. The Ukrainian people have been put into a difficult situation as the Europeans and the United States do not have the fiscal nor political will to stop Russia from the all-out takeover of the Ukraine. Crimea happens to have a natural gas pipeline terminal that loads natural gas into liquid natural gas containers!
Cold Case. Additionally, seven days later a large Boeing aircraft vanished between Malaysia and Vietnam. Usually, when a plane crashes, radar is able to keep track of the aircraft as the transponder pings the air traffic controller between airports on a given vector making it impossible to “lose” a plane. After three weeks, the whereabouts of the plane remains a great mystery!
Cold Hard Cash. The U.S. stock market continues to climb the perilous Wall of Worry. Despite all the world’s ills, somehow the market has continued to remain resilient. With several trillion dollars floating around in CD’s and money market accounts, the smart money and high net worth individuals have been waiting for a ten percent correction before jumping back into stocks. Since 2011, the market has slowly melted up, squeezing out short-sellers enjoying the benefits of easy Fed policy.
Cold Reception. With all these events, the U.S. stock market remains very strong. During the quarter, Janet Yellen was sworn in as the first woman Chairman of the Federal Reserve. In her first testimony before Congress she indicated that the Fed would continue the Quantitative Easing III until unemployment drops below 6% and that targeted inflation hits 2%. The market greeted her comments with a downward swoon in stock prices, only to recover several days later. Money Supply as measured by M-2 (broad measure) continues to grow at 9.4% on annual basis which should promote a healthy and robust economy for the next twelve months
Lukewarm at Best. Some life has been breathed into the housing market over the past twelve months. Housing starts have risen from 2009 lows but remain below 1.0 million on an annualized basis. In 2007, housing starts exceeded 1.4 million on an annual basis. Like the chicken and egg analogy, housing will improve when employment improves and vice a versa. The tepid recovery continues to give Fed policy the luxury of remaining accommodative until housing improves dramatically. The overall economy will also be affected by a better housing market, which has yet to take hold.
Warming Trend. In 2013, auto sales rose 7.6% exceeding 15 million cars and trucks. General Motors and Toyota sales rose approximately 7% while Ford sales rose 11%. Auto sales in general were weather weakened during the first quarter. Yet, we believe that auto sales will continue to rise during 2014.
Ice Fishing Season will come to an end! We believe that the overall economy will show signs of healing once the Great Thaw occurs. Spring flooding is coming! Severe flooding on the Ohio and Mississippi Rivers will definitely be a challenge for those who live in the area. Additionally, spring planting for farmers will be delayed in these areas as well. In Tennessee, we always wait till after Mother’s Day to plant.
Sizzling, Hot Stock Market. We remain positive for investment returns in the U.S. stock market in 2014. The easy money has definitely been made as the Dow Jones Industrial average rose from 6400 in 2009 to its present level of 16,300. Price earnings ratios have expanded to 15 times 2015 earnings from 11 times earnings in 2009. For the time being the PE expansion is forecasting very little inflation for the next 12 months. The U.S. Treasury bond market is not forecasting any significant inflation either as the 30 year bond yields recently dropped.
Cool down on Bonds. We remain cautious on all fixed income securities. We would only recommend securities with maturities of less than five years. Ultimately, long-term interest rates should rise spelling trouble for bonds and bond funds.
We remain cautiously optimistic on stocks and will raise cash levels should the markets go higher. We believe the S&P 500 can reach 2100 this year. As we approach that level, we will begin to raise our cash levels. It is an honor to manage your assets and welcome your comments.