The worse a situation becomes the less it takes to turn it around, the bigger the upside.” George Soros, hedge fund operator. Interest rates remain historically low, cash remains on the sidelines, and the Chinese and Indian markets have rallied significantly in 2009. As the fear continues to grip U.S. economic headlines, the world economies appear to be stabilizing. The U.S. stock market has rallied 2300 points from the March 9, 2009 low. The bankruptcies of General Motors and Chrysler certainly have dominated headlines as legacy costs combined with stagnate auto sales forced bankruptcy. Citicorp and General Motors have been removed from the Dow Jones Industrial Average being replaced by Cisco and Travelers. Deleveraging the New York banking sector has been painful and challenging for the new administration. It is completely understandable that U.S. investors are cautious about current market conditions.
Many Dollars Chasing Too Few Goods. Federal Reserve policy remains committed to reflating the economy. Turning the U.S. dollar into Monopoly money must be what Bernanke means when he states he will do whatever it takes to turn our economy around. Unfortunately, the housing market remains in a coma. The vital signs appear worse each day as unemployment rates have risen to 9.4% in recent days. Jobs are scarce in the U.S. primarily because the globalizers have given China and India distinct competitive advantages over domestic jobs. Made in America has become obsolete.
Penny Stocks. Lifetime lows in many stocks have been achieved over the past six months. Price earnings ratios can be argued as high. Dividends are being reduced though many stated yields are high. Companies do have high cash balances but must endure the recession til the economy truly recovers. Therefore, one can argue the market is both cheap and expensive. Presidential cycles usually take several months to restart the economy. Old policies are tossed and new policies are implemented. Socializing the Auto industry and the financial system has not been well received. Pending health insurance legislation has dampened medical related stocks. The prospect of rising income taxes has contributed to the markets’ weakness over the past several months.
Government Motors. In 1981, Lee Iaccoca along with Jimmy Carter orchestrated the turnaround of Chrysler piece-mealing Dodge and Jeep together and issuing double digit loans to the company. The deal worked and the slow recovery of the early 1980’s gradually mended the auto industry. Roger Penske is buying the Saturn name from General Motors, not the plants. His Indy 500 reputation lends credibility to the Saturn name. Fiat is in the process to buy Chrysler after Robert Nardelli managed to run it into the ground. Pizza pie, parmesan cheese and Dodge Mini-Vans all Italian Icons! German based Mercedes Benz still owns 19% and has been very quiet behind the scenes. Ford refused any bailout money and appears to be in the drivers seat to overcome the difficult automobile environment. Ford unloaded a boat load of Palladium last January near the height of the commodity appreciation and has recently attracted capital when GM and Chrysler were unable to. Ford had a better idea!
Reversion to the Mean. The sharp sell-off in all financial markets last fall remains very impressionable to all of us. The integrity of the stock market is in question as insiders remain net sellers of company stock. The initial public offering market is virtually non-existent. The appetitive for risk has improved in recent days as banks get back on their feet from near death. The financial empire in New York has definitely been shattered. However, the markets have recently begun climbing a very treacherous wall of worry which is characteristic of market bottoms. Since March 9, 2009, the market has steadily risen against the overwhelmingly negative news. Many leading strategists remain very cautious about the near term prospects uncertain to any significant improvement in the U.S. economy.
Market Psychology. Never before has such a different market psyche been so disbelieving of anything good! Somehow we only can remember the 9.4% unemployment. The extraordinary growth in money supply continues to support recovery not recession. The large amount of money in U.S. money market accounts eventually comes back into the market. The thirty-five percent rally since March 9 has been absent of “smart money.” The U.S. market now finds its levels at the proverbial Y in the road. Overcoming the negative issues can be remediated when true positive events take place. Turning an otherwise negative story like General Motors or Chrysler going bankrupt can become a very rosy picture if the legacy costs have been significantly reduced. Rebuilding the U.S. banking system may have an end to its problems if the housing industry stabilizes.
Trade Wars. China and India’s markets are leading our markets significantly. We believe real substance between our economy and their economies will dominate the news during the second half of 2009. Materials shortages are already occurring as raw materials are once again being snatched up by these rising economic powers. The collapse in commodity prices during the second half of 2008 suggested that the world was awash in all commodities. However, most of these materials are now coming from overseas producers. The quest for obtaining these precious commodities costs real money. Wall Street bankers do not bring oil out of the ground. Procter & Gamble sells razor blades, coffee, and other personal products, but does not mine for copper, bauxite, or coal. Raw materials are required by everyone regardless of whether another house is ever built or car manufactured. Normalcy will return, but everything is going to cost more as larger industrial societies in China and India compete against us for these raw materials.
Thank you for your patience in a very turbulent time in financial history. Unprecedented events have impacted all of us and real questions regarding the integrity of the capital markets. We continue to manage your money with the keen awareness you have other alternatives in managing your money. Long-term investors are now being rewarded with improving asset values. Panic did set in, but now cooler hands are prevailing. Eventually, we believe the inordinate negative perspective will give way to brighter outlooks for our investment markets.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027