Happy New Year!
“When 900 years old, you reach….Look as Good, you will not.” Yoda. As we kick off 2017, we looked back 100 years ago as it was a pivotal year in the U.S. as well as the World as the second termed President Wilson asked the U.S. Congress to declare war on Germany after the sinking of the Lusitania and several other U.S. ships bound for Europe. During the same year, Vladmir Lenin, along with several comrades, orchestrated the Bolshevik Revolution which led to the assassination of the Czar Nichlolas and wife Alexandra. During the next sixty years, the Bolsheviks killed capitalists, Priests, and police officers that remained in Russia. It has been estimated the Bolsheviks purged over 20 million Christians and Jews from 1920 through 1950. During the 1980’s, political fortunes changed as the U.S. essentially outspent the Russians on military and technological advances which led to their demise under Mikhail Gorbachev with the fall of the Berlin Wall 1989. Finally, in 1917 the Balfour Declaration in Britain set forth the opinion that a Palestinian settlement would be supported to establish a national home for the Jewish people. The dream became a reality in 1948 with the full support of President Harry Truman.
“Traveling through hyperspace ain’t like cropdusting, farm boy.” Hans Solo. Fast forward to 1999, when the powers that be, especially the Chairman of the Federal Reserve—Alan Greenspan, decided to completely deregulate the banking system allowing commercial banks to merge/sell out to investment banks. Already, Citibank had merged with Smith Barney and in the course of the next eight years, Wall Street investment firms merged with large commercial banks. The stage was set for the collapse of Wall Street in 2008-2009 dramatically mimicking the Crash of 1929. Sometimes lessons are never learned. The Glass Stegall Act in 1933 was instituted to separate the investment banking activities from commercial banks. We believe that in 2017 Glass Stegall needs to be re-adopted in order to guard our financial system from the drunkenness of the 2000’s.
“I find your lack of faith disturbing.” Darth Vader. The stock market bottomed March 9, 2009. Excess liquidity was supplied by the Federal Reserve and the President provided nearly $9 trillion in Fiscal stimulus over the next 7 ½ years leading the Dow Jones Industrial Average from its bottom of 6400 to nearly 20,000 more recently. Near zero percent interest rates pervaded during this period as the economy did not produce an acceptable level of inflation.
“Aren’t you a little short for that storm trooper?” Princess Leia. In the past ninety days, the U.S. stock market rose dramatically as negative sentiment stymied the market after Labor Day. We discussed the notable investor that had taken stock market positions that would have made tremendous returns had the market turned down during the fourth quarter. Many individual investors followed suit and were waiting for the market to go down. The wall of worry included much uncertainty regarding political changes, international crosswinds, and Britain leaving the European Union. We believe that the overwhelming negative sentiment had more to do with the rise in stock prices than who won the election. Additionally, bond investors have actually lost money in the market during the past ten weeks as bond yields actually rose. For years, we have discussed bonds being swapped and going into stocks. Just maybe we are at the forefront of a significant bear market in bonds.
Global Yields on Government Bonds
Maturity USA Euro United Kingdom
2 YEAR 1.29% -0.83% 0.05%
5 YEAR 2.06% -0.56% 0.46%
10 YEAR 2.55% 0.20% 1.16%
30 YEAR 3.12% 0.91% 1.93%
“There is good in him, I have felt it.” Luke Skywalker. We now prepare for the next 100 days of the new Presidential Administration. The new President will be greeted with a budget deficit approaching $20 trillion with another $75 trillion in off-balance sheet debt guaranteed by the U.S. Treasury. The bond market has fired a shot heard around the world as the 30 year Treasury yield has risen almost 1% since September increasing from 2.25% to its current 3.12%.
“Help me Obi-Wan Kenobi, You’re my only hope.” Princess Leia. The Federal Reserve also increased interest rates in mid-December by ¼ of a point being the second interest rate increase in the past twelve months. The Federal Reserve has communicated its plans to raise rates in 2017 depending on an improving economy. The immediate collateral damage from increasing rates has been a stronger U.S. dollar during the past eight weeks raising the costs of any products shipped from the U.S. abroad. Additionally, companies with international business will experience lower profit margins from international business.
“Sir, the possibility of successfully navigating an asteroid field is 3720 to 1.” C-3PO. We still believe that a Great Inflation will occur in order for further interest rate increases to be absorbed by the economy. Bank stocks have increased over the past 10 weeks as optimism that rising interest rates will improve profits for banks. We remain cautious on financial stocks as many of the negative issues will not be resolved without regulatory and legal changes to come. It is too early to know if any changes mentioned by the new administration will occur.
“Fear is the path to the dark side.” Yoda. With the stock market near historic highs, we believe the market is currently fairly valued. The S&P 500 is trading at 17.1 times 2017 earnings with 2.1% dividend yield. We have guarded optimism about the coming months and believe that an economic slowdown will occur sometime in early 2018.
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027
Quotes from www.shortlist.com Top Quotes from Star Wars movies.