Interest Rate Ground Zero. Liquidity is being restored at least to the financial markets as yields are near zero for short-term U.S. Treasury bills. Record money supply growth during the past twelve months has pushed yields down as a result of $2 trillion in money market assets bidding the price of risk free securities up while longer term interest rates have actually began to rise. Federal Reserve policy has monetized all kinds of toxic securities held by the nation’s largest banks. Ticking time bombs, these toxic securities have a multitude of bad assets behind them in the form of mortgages, SIV’s and other complicated investment vehicles created over the past that crippled the largest banks. The banking system has been stabilized and the stock market reflects the good news in the form of a significant market appreciation since March 2009.
The World Awash with Cash. The BRIC markets comprised primarily by China and India have provided great appreciation this year as their respective economies continue to grow at double digit rates. Worldwide central bankers have provided similar liquidity in face of the financial crisis from a year ago. The pendulum swings both ways. Therefore, the rise in stock prices has given investors a reprieve and long-term investors have been rewarded as liquidity continues to flow like hot lava from a great volcano filling in cracks and crevices left from the market decline last year. Disbelief and bearish sentiment continues to permeate many as cash positions remain high as skittish market forces left many with distrust for stock market investing. Subsequently, there is no reason why 2010 could not see market further market appreciation.
Where is Joe McCarthy when you need him? Creeping socialism has accelerated. New political leadership is providing hope and change in the form of higher taxation and anti-capitalist policy that squelches market prospects. Reversing course and raising taxes does not create a great environment for investing. Record budget deficits, at the advice of pro-Keynesian economists, are being pursued to theoretically stimulate economic growth increasing the size of our debt while the consumer has been reducing personal debt and actually saving money. European styled socialism is influencing political thought in Washington at the time job creation should be the single most important issue at this time.
Bull Market Relief. After nearly a sixty percent increase in stock prices from the March 2009 lows, the market will face increased pressures against further gains at the current juncture. Corporate earnings must take the lead from here. Recent earnings have improved from recessionary levels earlier this year. Economic recovery appears on track suggesting that earnings for 2010 be higher than 2009. Low interest rates should foster an environment for continued improvement.
God Bless the 101st Airborne. The recent announcement that 40,000 additional troops will be sent to Afghanistan suggests that military spending will continue to grow. Government spending is occurring at record levels whether it isthe military, health care, highways, and additional stimulus packages for select Congressional districts. John Maynard Keynes proposed that governments can spend during recessions to stimulate the economy in the 1930’s as a remedy for the Great Depression. The political unpopularity of the current spending in Washington has recently raised eyebrows with the jury still out on its effectiveness in pulling America out of recession.
Worldwide Printing Presses. Governments around the world are doing the same thing in printing large quantities of money. As a result, the decline in the dollar which occurred during the first half of 2009 has subsided. The European Commission has greater debt problems in places like Portugal, Spain, and Greece. Consequently, the rating agencies have downgraded the quality of debt in these regions sending financial tremors causing the dollar to rally. We believe this to be short-lived and that current runaway spending in Washington is not going to subside any time soon.
Half Full—Half Empty. With very little fanfare, the U.S. stock market has rallied back to the 10,500 level on the Dow Jones Industrial Average. Zero percent interest rates is spurring economic recovery. Congress has provided the housing industry relief in the form of tax credits for purchasing houses. Foreclosures have slowed, but still some six million homes are either empty, for sale or available. The worst recession since the Great Depression has mobilized aggressive actions to stem further declines in housing. Losing several large lending institutions came at a bad time and contributed to the housing decline. Losing eight million jobs to foreign employers did not help matters. The battle between inflationary and deflationary forces has shunned investors from participating in the stock market. Any evidence that recovery occurs in 2010 may pull investors back into stocks.
Capital Formation. We remain constructive on stocks and believe they offer better returns than fixed income for the foreseeable future. Interest rates remain low and therefore dividend paying stocks remain very attractive for investment. We believe that inflationary pressures will dominate market forces in 2010 and that small and mid capitalization companies do better than large companies in the coming period. Economically sensitive issues should continue to perform well and we are avoiding bank stocks.
History Redux. The past ten years have been exciting. The decade greeted us with a scare that never happened as the technology bubble burst with the build-up of the Y-2-K phenomenon. The 2000 election was exciting as the election came down to several hundred votes in Florida that ushered in the Bush bunch. The War on Terror was launched in 2001 as the World Trade Center buildings fell, the Pentagon was attacked and another plane was supposed to hit the White House. In 2002, we launched the air and ground attack on Baghdad though our attackers came from Saudi Arabia. We launched further attacks in Afghanistan. In 2004, Bush was re-elected by a few votes in Ohio. In 2005 and 2006, speculators were flipping condos in Florida like day traders in the stock market. Congress fixed that in June of 2006 by eliminating 100% financing of housing which set the stage for the worst financial disaster ever when falling real estate prices caused many toxic assets to literally melt down large financial firms including Bear Stearns, Lehman Brothers, AIG, Indymac, Countrywide Credit, Fannie Mae, Freddie Mac, and marginalized the remaining financial institutions including Citicorp, BankAmerica and J.P. Morgan. As Bush left the White House, a financial bailout was orchestrated to lend $800 billion in TARP money to help the financial system survive. 2009 has seen some financial healing occur as the banking system has averted a major calamity. 2010 must bring much needed relief from the turmoil which we hope for.
By now most of you have received your first statement mailing on a new reporting format from Charles Schwab and Co. We believe that this more simplified structure will be easier to read and understand than the prior statements. Please do not hesitate to call regarding any issues you may have regarding this change.
We are honored to manage your assets and appreciate the patience you have exhibit through all that has happened over the past eighteen months.
Thank you for your business,
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027