Happy 4th of July! Summer is setting in and the financial markets have retreated from the April 6 intermediate high. With the U.S. markets flat for the year, the world markets have continued to weaken. Interest rates remain low, especially the short-term yields remaining below 1% indicative of the lack of jobs and weakness in housing. Debate about economic recovery continues to dominate the political and financial landscape. Record unemployment remains the glitch for any true recovery to occur. As with past recoveries, creating jobs remains critical for increasing economic activity. More importantly, we believe that a market bottom occurred March 2009 and the slow recovery will lead to higher stock prices for the foreseeable future.
Federal Reserve policy is mysterious at best. Bernanke has somewhat surprised most Fed watchers by slowing money supply growth during the first half of 2010. The dollar rallied during this period as a result. Recent data suggests that money supply is rising again. Bernanke has stated that he would sprinkle cash down from a helicopter to avert a financial depression if necessary. The Federal Reserve has been under attack by our Congress recently regarding the secrecy in which policy is conducted. Now with the 88 banks that have been closed this year, it is apparent that lending institutions remain a problem for Fed policy as well. Congress needs to be clued into its legislation that collapsed housing and had more to do with the banking problems than Fed policy. Giving four or five large banks oligopoly status was the final blow which crushed the small banks. Banking superpowers need to be broken up like AT&T in 1983, now. The concentration of power in New York/Charlotte has undermined the very fabric of our economy. Because inflationary fears have subsided since January, the Fed now has room to pump high powered money into the financial system and should stoke higher stock prices.
Losing a Decade or Two. Short-term treasury bills yields remain well below 1%. After the Japanese experienced tremendous growth in the 1980’s, it was unable to handle its new found wealth. Consequently, the Nikkei Dow peaked in 1991 at 41,000 and now hovers at 10,000. Several large hedge fund managers have said since the beginning of 2010 that China has grown into a financial bubble that would be unsustainable. We were skeptical of this but now believe that China’s best years are in the past. The Hangseng Index is down over 21 percent since year end. The tremendous bets placed on Chinese manufacturing facilities by U.S. corporations did not factor labor disruptions. The U.S. stock market is poised to lead the world markets and offer better valuations. We believe the cost cutting and streamlining of American corporations over the past twenty four months will lead to higher stock values in the U.S.
The Chinese have temporarily lifted its fixed price of the Chinese Yuan and the dollar by 1%. Unfortunately, this is not the kind of information we are accustomed to report to our clients. Over the past twenty years since George Bush, Sr.’s tenure in the White House, the Chinese economy has systematically supplanted all economic superpowers in becoming the largest manufacturing economy in the world. Unfortunately, under communism, the data is skewed and dated. The Chinese central bank owns approximately $900 billion of our $14 trillion in government debt and that amount grows on every Treasury auction. Our Keynesian approach to climb out of recession is relying on new foreign investors that include the Chinese, Saudis and other Middle Eastern “friends”? The Harvard crowd continues to believe in issuing as much government debt as possible. Ultimately bonds sell off, and interest rates rise.
Who shot JFK? For the past seventy-five days we have watched oil spewing from a breached oil rig 5000 feet under the Gulf of Mexico. The environmental tragedy appears to be great. The malfeasance of British Petroleum to operate the well when it was not ready makes very little sense. The Federal government additionally granted approval for their action. Against the advice of Transocean and Halliburton, the company decided to open the well knowing the cement had not firmed. Consequently, the largest oil spill in history is being unleashed in the Gulf of Mexico. Placing a moratorium on drilling is not the solution to our dependence on foreign oil. The oil industry is trading at very cheap valuations.
Atlas Shrugged. For you happy Marxists out there, the government has taken over General Motors, Chrysler, Citicorp, AIG, Fannie Mae, Freddie Mac, and makes billions off of the tobacco industry (we omitted the other 150 banks, GE, and insurance companies that accepted TARP money). It has subsidized the railroads for years. Additionally. American agriculture, airlines, trucks, and highway contractors also reap huge subsidies as well. The ObamaCare package moves closer to a total takeover of healthcare making Jimmy Carter and Hillary Clinton so happy. Now the oil spewing out of the Gulf of Mexico may speed up another nationalization effort of the U.S. oil business. European socialism is rampantly invading the U.S. like the British rock and roll invasion of the 1960’s. Lets see how did the Beatles’ song go….”Say you want a revolution?”
Rising Socialism Battles Capitalism. The fear of rising taxation as a result of multi-trillion dollar deficits under the Obama Administration is pitting free market capitalism versus accelerated socialism. State governments are running deficits to the tune of $127 billion for the current fiscal year. Obama has borrowed a record $1.5 trillion. The already beleaguered tax payer is scrambling to fend off the wolves at the federal and state levels. Absolute Democratic power in Washington that swept America in 2008 is haunting economic prosperity. We believe the mid-term elections will body check the liberal thought and the pendulum will swing back to more conservative policies.
What will $170 billion buy? This large sum of money was pulled out of equity mutual funds since the first of the year. Bearish sentiment obviously persists. Most of the money went into bond mutual funds as bonds have outperformed stock funds for the six month period. Long term investment philosophy is being challenged. We believe that great opportunity awaits the patient investor. We believe that the market offers good investment values today. 1The gloomy news in our financial press makes it difficult to generate a bullish scenario to invest in anything. Basic economic models do suggest that the economy will grow in the future. We believe the $170 billion will come back into the stock market over the next twelve months.
Where is the Wizard of Oz when you need him? We are digging the archives to find the final book by John Maynard Keynes about the end of the yellow brick road of government spending. Germany tried it in the 1930’s and proceeded to destroy its economy, and led to shortages of basic goods, and eventually led to rioting, war and holocaust. The Brits were pounded by German bombers and were rescued by the U.S. with our landing at Normandy. We believe the Federal Reserve will open the printing presses and rescue the miserable fiscal policies.
As your investment advisor, we remain grateful to serve you. At mid-year, we are more bullish on the stock market than in March. The bond market has rallied substantially and should lead the stock market higher. We find many attractive industry sectors and are witnessing insider buying for the first time in several quarters. We believe that our investment process is proven and that you will be rewarded. Long-term investing is not dead but very alive for the patient investor.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027