Happy New Year!
The Awful Truth. 2011 was a lost year in the stock market. Worldwide tradewinds disrupted reasonably good market conditions since June 30, 2011. Financial problems in Europe sent chills through the world markets as rumors of Lehman Brothers type meltdowns were predicted by many leading strategists at large institutions on Wall Street. Our own Federal Reserve is providing liquidity to U.S. Banks as well as assisting in the process in Europe. Volatility in the U.S. Stock market continues to dominate activity in New York though the market has finished strong in the fourth quarter. We remind our investors that the shape of the U.S. Treasury yield curve continues to predict economic growth though many remain negative about 2012.
Operation Petticoat. Prospects for positive investment returns for 2012 has historical precedence as nineteen out of the last 20 Presidential election years have produced good investment returns during the year of the election. We believe that the conditions are extremely positive for this to occur in 2012. World markets need to help in the process. During 2011, China, Russia, Brazil, Britain, France, and Japan all recorded double-digit declines during 2011. China and Brazil had been raising their interest rates prior to 2011 and only recently began lowering interest rates. We believe that at some point during 2012, worldwide economic growth will occur and that a major recovery will take place. Recent Federal Reserve announcements continue to maintain that short-term interest rates will remain low for the next eighteen months.
Penny Serenade. Interest rates in money market accounts remain at historical lows primarily due to the fact that nearly $3 trillion in cash has driven the yields that low. Additionally, with short and intermediate bond yields below 1%, another large chunk of assets could easily be switched from bonds to stocks with relative ease. Corporations are flush with cash and limited opportunity to reinvest in their own business. We believe that stock buy backs will continue to occur in 2012 that should support current stock valuations. The low money market yields makes dividend paying stocks a viable alternative as well.
The Toast of New York. Investment strategy continues to focus on economically sensitive issues that should benefit from economic recovery. Industrial companies, energy, telecommunications, pharmaceuticals, chemicals, and transportation companies are attractive for investment. Groups we continue to avoid are the financial stocks as an uncertain regulatory climate continues to present challenges to increasing profitability for financial stocks. Policy needs to separate investment banking and brokerage from commercial banking and eliminate the massive conflicts of interest that banks operated under since the repeal of Glass Stegall in 1999 which fully deregulated the banking system since 1934.
The Touch of Mink. We still believe in value investing. The rampant market volatility continues to affect markets. However, long term buy and hold strategies remain very profitable for the patient investor. We believe that the market still rewards investors and is predisposed to upward movement in stock prices. Long term strategies remained much maligned on popular TV shows and publications as advertisers tend to be linked to such businesses. We still believe that commitments in companies with low debt levels, reasonable top line revenue growth, and sustainable dividend payouts offer good investment opportunity for investors.
Charade. The commodity bubble continues to exhibit characteristics that the supply and demand is less favorable for substantial price increases for oil and gold. Worldwide monetary policy suggests that central banks are lessening the value of their currencies when double digit money supply growth occurs. Earlier this year gold exceeded $1900 an ounce. During this period multiple European central banks and the IMF unloaded bullion to recapitalize their banks. Rumors circulated that China, Vietnam and South Korea were buying at these levels. Simultaneously, our own Community Futures Trade Commission (CFTC) actually raised margin requirements for gold contracts in May, 2011 which has dampened some of the speculative buying of gold. We do believe that inflation will continue to be a bouncing ball in the coming months but runaway budget deficits will be financed by cheaper money which should support higher inflation for the immediate future.
Father Goose. Federal Reserve policy supports re-electing the incumbent President. No matter what, any recovery in the U.S. Housing market will seal the deal. Jobs, jobs, jobs, we believe that Congress and the President will do what is necessary to improve the housing market. For the past three years, housing starts have been at sub-par levels at a measly 500,000 on an annual basis. In good economic times, housing starts usually run around 1.4 million on an annualized basis. The Federal government must stimulate housing in either tax-based policy that encourages home ownership. The icing on the cake would be fixing GSE’s FNMA and Freddie Mac that separates good loans from the bad loans. The President must encourage the private sector to purchase the bad loans in a private auction process. This is the single most important issue facing the President’s re-election chances.
Houseboat. The economy can roar if housing is repaired. Already, the automobile industry acts better. Announced openings even here in Tennessee spreads some optimism in the domestic economy and will aid in economic recovery. We believe that the economy can catch on like wildfire if housing and automotive woes go away.
North by Northwest. With that being said, any recovery in housing and auto sales would heal the beleaguered banking industry. Banks need to be banks and not investment banks which incur too much risk at the hands of the depositors. Restoring the balance sheets of the banks would generate huge optimism in the market place and prime the financial pumps for full fledged economic recovery.
The Grass is Greener. As you can see, we are optimistic about 2012 and believe that investors will eventually be rewarded for their patience. Finally, we find many of the international markets attractive for investment. China and Brazil are key components for worldwide economic expansion. As we have experienced the pain of their economies sputtering, hopefully we will benefit from their economies recovering from their painful economic woes.
Russell L. Robinson
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027