The Living Daylights. Winter is knocking at our door. The last report for the 2014-2015 winter forecast is suggesting a very cold winter for the Northern Hemisphere. The polar ice cap is 50% thicker than twelve months ago suggesting a normal, cold winter. Global warming fears will be replaced by higher energy bills, heavy coats and lots of snow. The recent declines in most commodity prices should help subsidize much higher demand needs in the coming months.
From Russia with Love. As the financial race to the bottom has weakened all currencies, the dollar has staged a significant rally against the major currencies in the past ninety days. The dollar’s strength has supplanted the bull market in commodities flying in the face of mounting worldwide tensions and conflicts in hot spots including the Ukraine, Syria and Iraq. The European Union and the United States have implemented trade and financial sanctions against Russia for them to cease military operations in the Ukraine. The militant group ISIS has become the focal point in both Syria and Iraq with the U.S. launching strategic air strikes on the known targets for this terrorist group. Ordinarily such instability created by these militant groups would cause commodity prices to rise, yet the dollar’s rise has quelled any such price spikes in oil and gold.
Goldfinger. With the departure of Bill Gross at the PIMCO investment company, we believe this is the precursor to a major turn in the U.S. Bond market. The PIMCO total return bond fund became the largest mutual fund ever resembling the Fidelity Magellan Fund in the 1980’s reaching its pinnacle in the late 1990’s. We recommend selling the PIMCO total return bond fund along with all other long term bond funds. Interest rates have fallen for 33 years since the 1981 peak. We believe that the Federal Reserve will conduct policy to raise interest rates. Federal Reserve policy must continue to provide cheaper money for the foreseeable future. We remain very neutral on fixed income investments and recommend only investing in bonds with maturity of five years or less.
The Spy Who Loved Me. Within the last ninety days, the stock market’s leadership has shifted to large capitalization companies while small to mid-capitalization companies have exhibited market weakness. The narrowness of the market indicates that investors have become less willing to take market risks. We believe this has created an enormous opportunity for long term investors. We still believe the Great Rotation from bonds to stocks is occurring and that large capitalization companies are expensive. The lack of good alternative investments in bonds and even real estate make the mid-capitalization companies attractive should the economy continue to grow.
Live and Let Die. The strong dollar has caused commodity based and economically sensitive companies to sell off. The Commodity Research Bureau index of commodities has dropped in the past twelve months. Already gasoline has reached $3.00 a gallon and may go lower. Gold has dropped to the low $1200 level and also may go lower. The targeted 2% inflation rate objective of Federal Reserve will not be reached any time in the near future.
Dr. No. The apparent glut of commodities should create a tremendous opportunity in financial assets especially stocks. The global stock markets should perform rather well in the coming months. Profit margins should improve for any company that uses fuels for shipping, heating, and electrical needs. Henceforth, the U.S. stock market should enjoy the benefits of lower commodity prices. Retail, food prices, air travel, auto manufacturing, utilities, chemicals, and on and on should be the beneficiaries of lower fuel costs.
On Her Majesty’s Secret Service. In the past three months, the dollar has strengthened from 5% to 10% against the major currencies including the Euro, British Pound, Yen and Canadian Dollar. With $17 trillion in debt, it is hard to connect the dots on why and how the U.S. dollar rallied that much in such a short period of time. Logic would suggest the dollar would continue to fall. What are the chances that Washington actually practiced austerity policies and operated with a balanced budget? Book your trip to Paris or Rome now!
ThunderBall. The only publicly traded electric car company, Tesla, trades at a value of $31 billion and will sell 35,000 cars this year. Conversely, Ford and General Motors sold 5.8 million and 9.3 million cars in 2013 and have market caps of $62.7 billion and $53.3 billion respectively. Tesla has a value of $891,000 per car sold. Ford and General Motors have values of $10,810 and $5,731 per car sold. If Ford and General Motors traded at the Tesla valuation, the respective values would be in the Trillions. Electric cars will go by the way side should oil prices drop back below $50 a barrel. We do believe auto sales will remain robust in the coming months.
You Only Live Twice. Current mortgage rates remain low. Yet, housing data has not reached levels achieved in 2005-2007. Housing starts remain at the 1.0 million level versus the 1.5 million level during the good economic times ten years ago. We continue to anticipate continued improvement in housing in the next two to three years especially as we approach the Presidential election in 2016.
For Your Eyes Only. We believe that long term investors will continue to perform reasonably well. Short term anomalies present challenges for investment strategy and cause hiccups along the way. We remain committed to value investing in managing your assets. We look forward to hearing from you and reviewing your investment objectives at your convenience.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027
(Titles from Top Ten James Bond Movies. www.007james.com)