Happy New Year!
Like a Rolling Stone. The mystery has been solved during the 4th quarter and Janet Yellen raised short-term interest rates a whopping 0.25%. Behind the scenes, the Federal Reserve has been experimenting with reverse repos which reduce monetary reserves as evidenced in the diminished money supply growth of 5%. The warning signs of austerity are being communicated to the financial markets. European money markets are experiencing extreme deflationary pressures with their short term interest below 0%. We see U.S. rates possibly following suit in 2016 should the Fed continue to tighten monetary policy.
Subterranean Homesick Blues. The big surprise in 2015 is the continued strength in the U.S. dollar versus other major currencies. We are confounded that it has rallied so much into the face of rising deficit spending over the past ten years. Like a pinball machine, literally trillions of dollars change hands every day between Europe, the U.S. and Asia bouncing back and forth chasing short-term yields. The carry trade which investors borrow at low rates in Germany and simultaneously invest in NewYork at higher rates seems to be the culprit in boosting the strength of the dollar. The phenomenon will persist until financial normalcy returns to the worldwide banking system. Already Russia, Greece, China, and several emerging markets have raised rates to defend their financial systems. At some point with rampant U.S. debt issuance, the dollar is ripe for a significant decline.
Positively 4th Street. The strong dollar paradigm has changed corporate earnings domiciled in the U.S. as foreign earnings decline based on rising dollar value. Additionally, companies are apprehensive to repatriate earnings back to the U.S. as corporate tax rates are higher in the U.S. The strong dollar is a double whammy on the stock market which explains the negative returns for much of the S&P 500 stocks during 2015. The contrarian view would say the dollar rally changes course in 2016 and that commodity values stabilize in the coming months based on improving worldwide economies.
Desolation Row. With gasoline at $1.50 a gallon, the cat is out of the bag that we have an oil glut. Apparently, oil tankers are parked out in the ocean unable to go to port because the storage tanks are loaded to capacity. Oil dropped in 2008-2009 to $37. Recent lows for crude oil temporarily dipped below $35. Goldman Sachs recently advised their clients oil might trade to $20 during the current decline. In the early 1980’s, oil peaked at $40 and did not bottom til 1986 at $6 a barrel. The oil industry seems to be its own worst enemy as fracking continues losing money as banking commitments dictate pumping crude at a loss. The bottom will occur when the pricing of oil no longer makes the front page of the newspaper.
The Times They Are-a Changing. Stock investment strategy remains challenging for 2016. We believe that deflationary forces will overhang corporate earnings for the coming months. The obvious beneficiary to low oil prices is transportation costs will fall precipitously. Shipping, travel and leisure industry will see improving profits. The consumer will enjoy an improvement in discretionary income as gasoline has dropped from $4 a gallon o $1.75. We now believe we entered into a mild recession during 2015. As a result, the U.S. business cycle is resetting and reliquifying. Like in 2008-2009, the industrial companies will recover when the economy experiences growth. Significant economic recovery will be held in check should interest rates continue to rise.
Tangled Up in Blue. Every four years, the U.S. holds Presidential elections. The calendar adds another day to correct a glitch in the Gregorian calendar. Also, the Olympic Games will be held in Rio De Janeiro Brazil this summer. The Presidential election will dominate the news and the financial markets for the next several months. Usually the markets rise during Presidential election years. We do believe that it will be difficult for the incumbent party to lose. The Summer Olympics will present major opportunity for terrorism attacks and will dominate the news during the summer months.
Mr. Tambourine Man. More recent terrorist shootings and attacks in Paris and San Bernardino have heightened the world that we have enemies amongst us. We believe that governments will be forced to increase security in technology, cyberattacks, travel visas, and air travel. Commitments to software that prevents data hacks will be made. Governments will need to police their borders better. Investments in technology that secures the integrity of data will be a major winner in the coming years. Additionally, in wake of recent terrorism acts, gun sales are going through the roof.
Just Like a Woman. Our new one world created by the worldwide web which eliminated boundaries and brought society closer together based on socio-economics that brings society together at every level. Doctors talk to doctors, collaborate, on a worldwide basis. Teenagers play xbox with other teenagers all around the world. School teachers share successful teaching concepts through education conferences. The point is the worldwide web has brought us all together. We can tell you that investment managers share investment concepts that improves our investment process due to the worldwide web.
Blowing in the Wind. We will continue to invest using traditional value management concepts. Low price earnings, safe dividend yields, cash flow, and reasonable debt to equity levels will remain the foundation for our stock selection process. Long term investors will continue to benefit from conservative investment principles as opposed to short-term strategies that have no clear beneficial investing strategy.
Visions of Johanna. We hope to continue as your investment manager for the foreseeable future. The investment challenges which we faced over the past twelve months should hopefully be understood and we successfully interpret market conditions and effectively implement a strategy which optimizes your long term investment returns. We wish you a happy and prosperous New Year!
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027
Titles from Top Ten Bob Dylan, www.ultimateclassicsrock.com