1. The downturn in the NASDAQ and the S&P 500 since March 2000 has been a wake-up call to Wall Street and Main Street.  Gone are the rosy forecasts.  No longer do you hear discussions about the “New Economy”.  The inevitable extinction of business cycles has been averted.  We can all breathe easier.  Alan Greenspan no longer mentions “irrational exuberance”.  For the time being, Federal Reserve policy has aggressively moved to thwart a severe economic recession.  As financial markets experience this dose of reality, many people and corporations have fallen prey to an over-hyped financial press that propagated many of the lies encouraging investors to do take risks above and beyond reasonable levels.  Sticker shock for many mutual funds and technology stocks has been severe.  In spite of these perilous times, conservative investments have produced good investment returns for the same period.
2. Recent revisions by the IRS indicated that corporate profits peaked in 1997, followed by three successive declines in 1998, 1999, and 2000 as reported by Caroline Baum at Bloomberg, L.P.  By reducing capital gain income, investors will find it unbelievable that corporate profits have declined since 1997.  As value investors, we have scratched our heads for the past three years as earnings trailed stock performance.  The only explanation is that extraordinary liquidity funded the price earnings expansion while corporate profits from operations declined.  The IRS report is in direct contrast to the Commerce Department’s earnings reports for the same time period.  Of course, the Securities and Exchange Commission also has a hand in the process, as financial account includes capital gains or extraordinary income in corporate earnings.
3. During the course of the past eighteen months, the U.S. banking system has been in an enviable position of record capitalization.  Fed policy has shored up the previously depleted deposit base; therefore the banking system has had tremendous deposit growth.  Only until recently, have deposit rates fallen.  Regional commercial banks have shored up their loan portfolios, reduced staffs, and become extremely efficient.  The banking system has a strong foundation from which to promote growth in the coming months.
4. The Federal Reserve reduced interest rates for the seventh time in 2001 today.  Not that interest rates matter anymore, since the current +9% money supply growth should avert any discussions about recession in the coming months.  Monetary policy has moved aggressively during the current period of falling industrial production. 
5. Corporate bond yields are trading at the widest spread since 1989/1990.  The short term U.S. Treasury yields have dropped substantially.  Many leading bond strategists are continuing to recommend investors buy bonds as “deflation” dominates economic discussions.  The Treasury yield curve has steepened which forecasts a coming inflation.  Inflation is the interesting phenomenon of too many dollars chasing too few goods.
6. Stock market strategy continues to favor value investing.  Leadership in the market continues to be companies/industries that have real assets on their balance sheets, pay sustainable dividends and trade at low price earnings ratios.  Weakness in the market has been in the growth components as revenue and income projections continue to get revised downward.  The majority of growth companies continue to have record insider sales of their respective stocks.  These informed investors must see more pronounced deterioration in the fundamentals of the companies they either work for or serve as corporate directors.  Microsoft chairman Bill Gates sold nearly 8 million shares of MSFT this past month worth $550 million.  

7. The value of the U.S. dollar against the European currencies has recently declined.  Foreign investors began shifting from dollar denominated currency to Euro-based currencies, as interest rates remain significantly higher in Europe than U.S. rates.  The European economies have been in recession longer than the U.S.  As a result, the U.S. economy is declining at a more rapid rate than European economies, which contribute to the falling dollar.  It remains too early to predict, but the dollar continues to be overvalued in the wake of recessionary times to follow.
8. The Bush Administration continues to implement its new agenda including a tariff for Canadian hardwood and Korea and Japanese Steel.  Trade negotiations could become scary if an escalation occurs with other major trading partners.  The passage of NAFTA and GATT under the Clinton administration was supposed to pave the way to easing the tensions among trading partners.  Free trade is better for markets in the long run.  Trade tensions that might lead to further restrictions would be negative for the markets in general.
9. Foreign stock markets are not enjoying the best of times as stock prices have fallen around the world.  Mexico is an isolated situation posting double digit gains this year, as the market for their products remain favorable due to the NAFTA agreement.  The European markets are down across the board, as well as the Japanese market, and European banks have raised interest rates for the past eighteen months.  However, markets move in tandem and these markets should respond favorably to the current interest rate cuts by leading European banks.  Japan remains unable to pull itself out of its economic mess that is now entering into its twelfth year. 
10. The energy market has taken a respite during the summer season and has replenished much of its depleted supplies from last winter.  Worldwide demand for oil continues to rise.  Energy supply should continue to be under pressure in the coming months.  The current decline in energy prices should be a positive for U.S. corporations and households during the second half of 2001.  Tighter energy supplies in 2002 should cause the price of crude oil to rise in the coming months.

 

    Robinson Investment Group remains committed to value management.  Our current investment strategy continues to find companies that do not carry heavy debt burdens, have             improving balance sheets and income statements. 

 

Russell L. Robinson

President