Happy New Year!

1. The Test of Time. On December 23, 2013, the Federal Reserve celebrated its 100th year birthday being concocted in Jekyll Island, Georgia creating the framework for the American banking system.  The current Fed policy of Quantitative Easing that started after the financial meltdown in 2009 remains the policy de jour as the Fed’s balance sheet of Open Market Purchases now exceeds $4 trillion.  Even more ironic is the sitting Fed Chairman is not being reappointed and will be replaced by Vice Chairwoman Janet Yellen who has indicated the QE III program will be continued under her reign.  The Financial accommodation has fueled higher stock market valuations with limited effect on U.S. job creation and sustained GDP growth.  Only recent data suggests that recovery is gaining traction as housing starts finally rose above 1.0 million on an annualized basis.  In 2007, housing starts peaked at nearly 1.5 million on an annualized basis.

2. The Trend is Your Friend. Over the past twelve months the U.S. stock market has risen approximately 30% while the bond market has experienced its first negative return in several years.  Yields on the 30 year Treasury bond rose from its May 2013 low of 2.75% to its current yield of 3.82% returning a negative 14% over the past twelve months.  More recent data from the mutual fund industry indicates the “Great Rotation” from bonds to common stocks is occurring as $277 billion flowed into stock funds for the first 9 months of 2013.  Year to date, $31 billion has flowed out of bond funds.  Not great, but we believe more will leave the bond market as investors digest the decline in bond values.  Bond investors should keep maturities short-term and hold to maturity.  The Fed will eventually raise short-term interest rates when good economic times occur.

3. Irrational Exuberance II. The Great Return in common stocks has been rewarding for long term investors.  Yet, the current high level of cash in money markets and bank deposits continues to suggest that many investors remain on the sidelines and might chase stock prices at all-time historical highs.  Price earnings ratios have risen from 11 times earnings in 2009 to 16 times 2014 earnings for stock prices.  The Inflation factor might change this.  Current deflationary forces have more recently fueled stock prices as $3 gasoline is a virtual tax cut for the American consumer easing the fuel burden that $4 gasoline held eighteen months ago.  Transportation costs are falling along with manufacturing costs that require petrochemicals and other raw commodities.  The recent 35% drop in gold bullion values indicates the markets are less stressed about uncertainty and that financial functionality has replaced the Great Dysfunction which prevailed since 2008-09.  We remain cautiously optimistic.

4. Wall of Worry Redux. Our worry list remains long as corporate insider selling is at the highest level in ten years.  Additionally, the U.S. markets have absorbed over 30 initial public offerings including Twitter, Facebook and Hilton Hotels.  Like the late 1990’s, irrational exuberance has crept back into our markets.  We believe the time is more right to raise some cash in stock positions that have moved up to higher valuations than normal.

5. Tis the Season to be Jolly.  Early spending data for the Christmas season indicates that retail spending is strong for 2013 despite the shorter season.  The recent stabilization of home values should also contribute to better economic times in the coming months.  Foreclosure rates have dropped considerably from three years ago.  We believe all the good economic news can persist for the next twelve to eighteen months with no political reason to tighten monetary policy til early 2015.

6. Accentuate the Positives. We do like the economically sensitive companies including chemical, paper, energy services, industrials, along with defensive companies in the telecommunication and pharmaceuticals. Additionally, the mid-capitalization companies continue to be the financial sweet spot for investors.

7. Bondholders Beware. We remain negative on financial services stocks though they have risen despite negative interest rate cycles which impair the profitability of these institutions.  We expect that the bond market will continue to be weak.  Therefore, the high dividend yielding stocks will be weak in a period of rising interest rates.

8. Higher Taxes, Lower Returns. For the most part, European stocks have risen along with the U.S. market.  China, Russia, Brazil, Sweden and Mexico have incurred negative returns for this year.  Much debate about the Chinese markets continues to confound even the brightest as investors have lost money in that market in 2013.  We would avoid these markets and not try to pick a bottom.

9. Caveat Emptor. Strategically, we would hold off on fresh new investment in the markets.  We would welcome a ten percent correction in the U.S. stock market.  The recent market strength makes it very vulnerable for that to occur.  We believe that a larger increase in bond yields would point to an inflationary trade wind that would reduce returns for all financial assets.

10. Thank You for Your Trust. We look forward to serving you as investment manager for the coming year.  We consider it an honor to manage your assets and look forward to helping you achieve your financial goals.

Russell L. Robinson


Robinson Investment Group

5301 Virginia Way, Suite 150

Brentwood, Tennessee  37027