Happy New Year!
1. A Tale of Two Cities. What a relief that the Mayan calendar did not correctly predict the end of the earth! The recent fascination with doomsday predictions certainly may sell magazines, newspapers and books, but investors need to remain patient as we enter into the 4th year of a very powerful rise in stock prices since March 9, 2009. The Fiscal Cliff is just another gimmick similar to the Y-2-K buildup in 1999 that dominated thinking between Washington and New York City which led to irrational behavior and unnecessary spending by government, business and individuals. The Fiscal Cliff will more than likely trigger the higher taxes and higher social security payments that had been suspended by George W. Bush.
2. Red Badge of Courage. For the past 4 years, no budget has been presented to Congress by President Obama. Therefore, the Keynesian government spending by the White House has added over $3 Trillion to the overall budget deficit which is approaching $16.4 trillion. We believe the President has no intention of negotiating with the Republicans. Furthermore, the Republicans do not really want to lose all of the entitlements going to their States and Congressional districts. Similar to the passage of Obama-care, the budget impasse will occur and we believe that trillion dollar deficits continue for the duration of his tenure in the White House. The average interest cost at Treasury borrowing rates is approximate 1.83% using today’s five, ten and thirty year U.S. Treasury yields or $18.3 billion per trillion borrowed. If the Treasury refinanced all of its debt today, using $16.4 trillion as the amount, the average annual interest would approach $300 billion. Therefore, we believe the market understands the Fiscal Cliff is not that big of a deal. Keynesian economics is going to last longer.
3. 1984. The U.S. Treasury yield curve continues to forecast economic recovery. Three month Treasury bills trade at approximately 0.05% and the 30-year Treasury bond yielding 2.94%. With three trillion in money market accounts and billions more in bond funds barely making 1 or 2 percent, we believe that some of the money will eventually flow back into the stock market. We believe the bond market is going to crack at some point leading to higher bond yields. Not until investors begin losing money on bond principal will this take place. We still believe that inflation should stick its ugly head up over the coming months biting into financial assets which includes all bonds. Inflation will also put a cap on stock prices once the market identifies too few goods being chased by many dollars, euros, yen, and yuan.
4. The Grapes of Wrath. China, Spain, and Portugal earned dubious honors of being the only three stock markets to have negative returns for 2012 amongst all world markets. The U.S. markets returned 12.8% and 6.9% for the S&P 500 and the Dow Jones Industrials. Despite all the negative word from Europe, most of the major markets were up in Europe, except Spain and Portugal. All of Southeast Asia was up except China. All of the Americas were up in 2012. Again, we believe we remain in a very powerful move in stocks despite all of the negative press. The trend remains your friend.
5. Gone With the Wind. Housing prices have actually rebounded over the past twelve months. Demand for housing continues to improve but at levels significantly lower than in previous recoveries. Some regions of the country are doing better than others. Foreclosures have dropped in recent months. We believe that housing will take years to attain levels of normalcy. Housing starts are running at 860,000 on an annual basis, or about 50% below 2005-2007 levels.
6. A Farewell to Arms. The economic recovery will enter into the fourth year in 2013 from the Great Recession. The worldwide Central Banks are truly printing money at levels never seen before. In the U.S., money supply is growing at 7.2% on an annual basis. We believe the sense of urgency is well behind both monetary and fiscal policy to change course dramatically. However, the great problems which zero percent interest rates present to financial institutions make net interest margins slim providing modest profitability for banks. We still believe that interest rates will rise as the economy heats up. Worldwide economic activity is lukewarm at best.
7. Siddhartha. During 2012, commodity prices for the most part rose. Crude oil dropped 11.1% as supply improved from North Dakota oil wells. Already gasoline prices dropped just in time for the Christmas season. Steel prices dropped 45 percent as Chinese steel companies dumped supply at very low prices. Lumber rose 47% as a result of housing coming off severe levels in 2010-2011. Gold has risen only 2.9% after rising above 1700 twice during the year as Middle Eastern tensions escalated. We do believe down the line that Gold will reflect the rampant money supply growth and rise in price. Most of the grain prices rose in 2012 as the effects of the Mid-Western drought impeded production and supply. Corn and soybeans rose 15.4% and 25% respectively.
8. Cry, the Beloved Country. The new Presidential Administration is going to welcome a new Treasury Secretary yet to be named. Additionally, the President will select a new head of the Securities Exchange Commission, yet to be named. We believe that runaway budget deficits continue until interest rates rise significantly. We believe the Federal Reserve will continue with as many quantitative easing programs until unemployment improves. These two policies should ultimately destroy the value of the U.S. dollar and lead to higher interest rates.
9. To Kill a Mockingbird. The crystal ball for 2013 is hazy at best. We do believe that smaller and mid-capitalization companies will enjoy greater profitability than large Blue Chip companies. We believe that in an economy with rising inflation that cash flow increases have greater impact on the smaller companies and outperform large capitalization companies. From 1977 to 1980, Small capitalization companies outperformed large capitalization companies by 300 basis points, or 3%, for four years.
10. Call of the Wild. The recent decline in gasoline prices should help profit margins for several industries including transports, retail, and utility companies. Natural gas remains low going into the winter season, though it has recently risen off of ten year lows. We believe that energy prices should remain tame for the coming months as supplies appear very ample.
We remain cautiously optimistic for the financial markets and appreciate you allowing us to manage your investments. We look forward to the New Year and wish you a prosperous one. Titles come from www.squiddoo.com, Top Ten Classics.
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027