October 1, 2017

 

Wichita Lineman.   2017 began with great optimism that the U.S. government was going to reduce income taxes and reduce government regulation.  The reality is that Washington has a new dose of gridlock as both political parties are not cooperating with the new Administration.  Except for executive orders, no major policy changes have occurred this year.

Gentle on My Mind.  We believe the Federal Reserve might quit raising rates for the next twelve months simply because the Treasury market is discounting very little inflation in its current yields.  Over the past twelve months, the Money Supply growth rate has dropped from 9% to its present anemic 5% level.  Historically, inflation occurs when money velocity accelerates.  Velocity has been de-accelerating for several years.  Without rampant money supply growth, we see very little chance for inflation to approach 2%, the targeted inflation rate.  Additionally, we have experienced multiple hurricanes this summer with tens of billions of dollars of damage in Texas, South Florida and Puerto Rico.  We expect extra government spending to address these damages.

U.S. Treasury Yields

90 days                                                1.016%

6 months                                            1.18%

1 Year                                                 1.29%

5 Years                                                1.84%

10 Years                                              2.22%

30 Years                                              2.76%

God Only Knows.   Recently the financial markets discovered Crypto Currencies.  We believe this fad is one more method to sucker “smart” investors into outrageous financially engineered alternative investments offering no economic benefit to society.  Crypto-currencies have exploded into a market attracting billions of dollars in real money to promulgate a market that exceeds $60 billion, estimated.  The best information we have is that these currencies are created by mathematic algorithms and if you are early into them, they fabricate gains.  As far as we can see, no regulatory agency here or abroad regulates these fictional currencies.  Like the Dutch Tulip bulb market in the late 1600’s, only the rich and in-the-know people are making these investments.  Maybe drug dealers, organized crime, and other illegal operations use these currencies.  As a registered investment advisor, we are not allowed to participate in Crypto currencies!

Try a Little Kindness.  The market had risen over the past ten months but the positive returns have been very narrow with the Five Fang stocks leading the parade (Facebook, Apple, Netflix, Amazon and Google.).  We performed a review of the ten largest equity mutual funds and the ten largest ETF equity funds.  Without exception, the findings showed that the largest five holdings were Apple, Microsoft, Google, Facebook and Amazon representing in some cases 20% of the overall portfolios.

Country Boy-You Got Your Feet in LA.  In January 2000, Time Warner purchased American Online at $182 billion and never recovered from this colossal mistake.  By 2001 the tech/internet bubble popped in a big and powerful way.   We believe the conditions are right for another error in judgement by a large tech company to repeat such an error as most of these companies are trading at such high prices.  Buyer Beware!

By the Time I Get to Phoenix.  Other than the Fang stocks, selective industrial stocks and health insurance stocks have performed reasonably well this year.  For much of the stock market, many large cap stocks have been correcting in price since February.  Like 1998-2000, the Y-2-K rally was confined to basically 10 companies that were not value stocks with high price earnings ratios and no dividend yield.  Value has definitely underperformed Growth in 2017.

Southern Nights.  The stock market continues to churn like a hurricane stalled out in the Caribbean.  The market continues to encounter many walls of worry.  The list is long.  War with North Korea is front and center, as its Dictator continues to shoot test missiles toward Japan and Guam.  The multiple wars in the Middle East continue to distract leaders from properly addressing domestic issues.  Somehow, like falling water on a duck’s back, the market continues to absorb the bad news and continues to rise.  Grid lock in Washington D.C. appears to be the norm and not the exception these days and yet the market keeps twisting and turning higher.

Galveston.  More recently OPEC says that its effort to reduce capacity is sticking and actual supplies are dropping which favors higher stock prices for energy stocks.  The active hurricane season should translate into increased revenues for lumber, copper, cement for the foreseeable future.  We see materials, home builders, and tightening commodity prices with total damages approaching $50 billion.

Rhinestone Cowboy.  The Amazon effect on retail appears to be overdone in our view creating excellent value in retail and consumer based companies.  Amazon Prime has become an American pastime as people enjoy “free shipping”.  The glitch is returning the merchandise when it is not what you wanted or needed.  The free shipping is actually subsidized by the U.S. taxpayer to the tune of $1.47 per package.  At some point the competitive advantage of free shipping and no sales tax will be eliminated.  We believe that most people still like to go shopping and that retail companies will blend and enhance shopping with ecommerce as well.

Dreams of the Everyday Housewife.  We still maintain healthy positions in telephone, pharmaceuticals, and large oil companies.  We believe these companies enjoy healthy cash flow to support these attractive dividend yields.

 

Russell L. Robinson

5301 Virginia Way, Suite 150

Brentwood, Tennessee 37027

Titles:  Best Songs of Glen Campbell who passed in August 2017.