The Man Who Knew Too Much. Ben Bernanke has completed his announced QE II asset purchase program which has grown the Adjusted Reserves at an extraordinary rate. Recent data for bank lending remains anemic though banks do have the capability to make loans. Unfortunate for our banking system is the leverage for banks continues to be high cramping their ability to increase lending risk. The prevailing headwind of deteriorating housing values remains the financial wildcard for loan assumptions and tight lending rules imposed by the FDIC for the troubled banks creates a quandary for bank management. Chairman Bernanke knows this as well as soft employment data. We believe that Bernanke will announce a third asset purchase by the Federal Reserve by the fall of 2011.
Vertigo. The stock market has stalled recently as rumors that Greece and other smaller European nations remain in financial peril. The European contagion spreads all over the world as our financial markets move in concert on the upside as well as the downside. The financial market rally which coincided with the QE II in October 2010 has recently corrected spawning crash-like conversation driving market speculators to pile on market shorts exacerbating the recent market correction. We believe the QE II will have some lasting effects on the overall economy as corporations remain cash rich. Economic activity is improving, though the summer doldrums give the Bears some leverage resulting in the recent move down in the markets. We remain long term Bulls and believe the markets offer excellent investment opportunity at this juncture.
North By Northwest. Investors are getting an excellent window to buy stocks right now. Quickly, the inflation fears have been replaced with deflation fears since Memorial Day. Deflation is not good for the financial markets. Mysteriously, the rise in commodity prices have reversed recently as apparent shortages have drawn short-term solutions to long term problems. The attempt to “flood the market” with crude oil by Sovereign nations only delays the inevitable. Since none of us own our own Oil Rig in the Gulf of Mexico, we are at the mercy of Exxon or Chevron or Saudi Arabia to put fuel in our tanks to reach our 4th of July picnic. We may all feel good this summer with some pump price relief. The root problem remains as government moratoriums of drilling for oil ensures longer term shortages of crude oil for the foreseeable future.
Psycho. The fixed income markets have rallied nicely since March reflecting the cool down in commodity prices. Runaway budget deficits seem to not be that big of deal as the Treasury market yields have recently dropped. The great prediction that the dollar would be supplanted by another foreign currency as the World‟s reserve currency has not happened as of yet. The world financial powers each have different agendas. The oil-based economies have enjoyed tremendous financial success with $100 crude prices, but like in 2007-2008, high prices cannot be sustained for very long without a price break breather. Lower oil prices should bring some stability to the Middle East. The overall stock market should improve in the immediate future.
Rear Window. The Chinese financial success appears to be broaching a plateau as they handle the pitfalls of their success. Rising wages, real estate bubbles and limited knowledge of capitalistic principles have become challenges for the Chinese Communist Government. Governments around the world must evaluate their relationship with China and avoid “losing” to them. All these globalizers lined up to finance the “start-up” in China and sold their own country out to be in the game. Starting in the late 1980‟s, our policy to finance Russia and China’s move into capitalism should be re-evaluated as the U.S. suffers its highest real unemployment rate since the 1940‟s. Not just with China, the U.S. needs to bring its Army home and spend those resources on building our economy. The China Syndrome still overhangs our economic system. The endgame for the U.S. and China may not be pretty.
Young and Innocent. The Dot.Com Bubble II is here as unrealistic valuations are being realized by initial public offerings in the tech world, especially in social networking and coupon companies. Older technology companies are trading at substantial discounts to these new upstarts. Buyers must beware of the outlandish values and not fall prey to old Wall Street Tricks of chasing overpriced stocks.
To Catch A Thief. The sheer size and power that the hedge fund world has on Wall Street and Washington is staggering. Hedge Fund kingpin George Soros was the largest fundraiser and contributor to most of our Washington leadership over the past ten years buying power and persuasion. His “non-profit” organizations are far reaching and expect great political power in return. Both aisles of Congress receive donations from many of the ancillary “non-profit” organizations of this man. His greatest accomplishments have been to take down the British pound in the early 1990‟s, the Indonesian and Russian stock markets in 1998 causing the collapse of Long Term Credit hedge fund. The regulation of hedge funds by the SEC continues to be thwarted as power begets power. Rules for investment advisors like Robinson Investment Group discourage many of the activities that hedge funds employ and benefit their investment returns. If the Fox is guarding the Chicken Coup, then how can investors play fair without getting hurt? Hedge funds continue to be unregulated, for the most part. Until this changes, we expect further market volatility for investors.
The Birds. Over the past thirty years of being in the business, we have always factored in many “walls of worry” in our investment process. More recent technological trading platforms certainly have made investing less equal as large Sovereign Funds and Hedge Funds have assumed the role of “market-maker” for the stock market forcing the securities firms out of this once necessary function. Wall Street investment firms no longer make markets as they did in the late 1970‟s and early 1980‟s. Consequently, shrewd investors must continue to ferret out companies that truly are undervalued and block out the noise generated by hedge fund companies. “Fast-Money”, day trading, and momentum investing has promulgated an entire cottage industry of investors who only invest in the idea of the day. Robinson Investment Group has maintained its longterm investment strategy of holding investments for three to five years. We still believe this strategy is in the best interest of our clients.
Frenzy. Since the early May, 2011 sell-off, we believe that investors need to be patient. The drop in most commodities since then certainly is raising fears and doubt of a legitimate recovery for investors. The lack of leadership in Washington by both parties makes it very clear that no good legislation is coming to fix the problems that exist. We recommend to be on the same long track that smart investors have had success. Long-term investors always do better than short-term trading strategies despite the advertising of Wall Street.
The Wrong Man. The future does not rest in a President, Senator or even a Federal Reserve Chairman. The Future still rests with the will of the people, good or bad. American Capitalism remains the greatest power the world has ever witnessed. We believe the crème will rise to the top and the future remains bright for investors. We remain committed to our value investment philosophy and believe that long-term investors will continue to do better than short-term investors. Thank you for your confidence in our management and look forward to meeting your investment needs.
Russell L. Robinson, Sr.