“Speak softly and carry a big stick.” The Chairman of the Federal Reserve has cast a big vote for the incumbent President by announcing the QE III which will purchase $40 billion each month in bonds as well as $45 billion in reinvesting mortgage payments from previous QE II maturities. The Fed’s balance sheet assets have risen from a meager $773 billion in 2009 to its current $2.6 trillion primarily in U.S. Treasury securities. Money supply as measured by M-2 is growing at an 8% annual basis. Chairman Bernanke has received great criticism that QE III will stimulate the economy at the expense of the U.S. dollar. Recent pronouncements that Chairman Bernanke would not be reappointed if the Republicans take control of the White House may have been the catalyst that spurred the Chairman from waiting until after the election. The stock market has responded favorably to the announcement which occurred just after the Labor Day holiday in early September.
“Few men have virtue to withstand the highest bidder.” The U.S. bond market remains bid up in price resulting in continued lower yields for investors. One year ago the Standard and Poors bond rating service downgraded U.S. Treasury bonds and the bonds have rallied significantly over the past twelve months. We believe that yields on these investments have no place to go but higher. We recommend investors avoid these investments and to sell any bond funds.
“Wealth can only be accumulated by the earnings of industry and the savings of frugality.” The U.S. stock market is up year to date and for the past twelve months. Courageous investors who stayed in the market have been rewarded handsomely. The Great Wall of Worry that the market has climbed remains very present as the Middle East is in turmoil, the European debt crisis is years away from being over, the Great U.S. fiscal debt cliff looms in December, massive liquidations in U.S. stock equity mutual funds since the first of the year, an ever weakening Chinese economy, high U.S. unemployment, prospects of China and Japan battling over obscure islands, and on and on. For some reason, the U.S. stock market is up. We believe that stocks can melt-up even higher as large amounts of cash continue to be in money market and certificate of deposits.
“The only thing we have to fear is fear itself.” At the beginning of 2012, we did say the stock market would rise in 2012. Nineteen of the last twenty Presidential election years have seen the U.S. stock market make gains prior to the election. Many remain on the sidelines as $2.7 trillion remains in money markets. That is Ok. More importantly, many smart investors are placing bets the market falls by selling stocks short. As the market melts up, the short-seller is forced to cover the short and buy to cover the bets, henceforth a short-squeeze. The next 30 days may be quite interesting as the market remains in a positive trend longer term.
“The ballot box is the surest arbiter of disputes among freemen.” U.S. corporate earnings are improving though recent pre-announcements indicate an economic slow-down for the 3rd quarter. Yet, a great skepticism exist about the economy after the Presidential election. Companies that have European exposure have experienced weakness in that region. China has announced their economy is no longer growing at double-digits, but only at 5 to 7% which is pretty good. The appetite for raw materials has waned in these regions and should give suppliers a much needed break in building inventory. Longer-term, any economic reacceleration in China and Brazil should create some supply issues in the next eighteen months.
“We must adjust to changing times and still hold to unchanging principles.” Oil demand remains strong. Yet, the U.S. currently has more than usual and that should bring down oil prices in the coming months. The Saudi Arabians have announced they would supply extra oil should a Middle East disruption take place due to problems in Libya, Egypt and more recently Syria. Iran is rattling sabers directed at Israel. On the domestic front, oil is flowing out of North Dakota adding incremental supply that is alleviating the price tension for the short-term. We expect prices of oil to drift down in the coming months.
“The business of America is business.” We remain positive for the stock market for the coming months. We continue to favor economically sensitive issues including transportation, chemicals, papers, and industrial companies. We are neutral about telecommunications as yield hunters have bid prices ahead of fundamentals. We remain negative on finance and banking due to the narrow interest rate margins and anemic loan demand. Should interest rates increase, profits for financial firms will be reduced. Raw material companies have pulled back as Chinese demand has slowed. Housing has improved, a little. If housing ever approaches a more normal rate, then demand for raw materials should increase. Steel, copper and aluminum prices have all contracted as excess supplies from Southeast Asia are dropping pricing power. We remain positive about health care as the aging baby boomers face increasing health care needs.
“If anyone tells you that America’s best days are behind her, they’re looking the wrong way.” Since March 9, 2009, the Dow Jones Industrial Average has risen from 6400 to the recent 13,500 level. The market is adequately priced for real good economic news in 2013. Investors who have remained invested have been rewarded handsomely. Investors who are waiting on the sidelines should be very cautious. Any ten to fifteen percent drop in stock prices would give investors ample opportunity to invest.
We remain grateful to serve as your investment advisor and welcome meetings and conversation about your investments in the future. These quotes are from sitting Presidents.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027