Capital Ideas Newsletters


A Bad Year for Paraskevidekatriaphobics

January/February 2012

You are probably asking yourself, “What is that?” It is the fear of Friday the 13th, which is considered to be an unlucky day. This year there are three of them! That, however, is probably the last thing an investor should be worried about. Let’s instead list some of the justified concerns.

There is an enormous U.S. budget deficit, muted U.S. economic growth, European debt issues, China’s slowing economy, uncertainty surrounding Japan’s ability to rebound, Iran’s nuclear capability to name a few.

Though many problems exist, at least we are “turning over all the rocks” so that these problems are being identified and dealt with pretty much all over the world. Capitalistic societies are evolving and, therefore, are dealing with the changes that their economic development has brought about.

In a Financial Times article last month, Michael Ignatieff said, “The fairness problem in capitalist societies is compounding economic problems. The new president will discover that societies where millions feel the deck is stacked against them are tough to govern.”

Now some good news… last year, America was a net exporter of refined petroleum products. In the wake of all that occurred in 2011, this fact reflects true progress. U.S. Energy independence can be realized, but we need more government incentives for the population to move in that direction.

In the New Hampshire primary, protesters held physical signs that read “The bigger the government, the smaller the citizen.” In some ways this is “the question” of the next elections.

The Facebook initial public offering has created a feeding frenzy. Facebook has become the greatest and fastest-growing phenomenon I have ever witnessed. We believe that along with Google, Facebook represents the biggest invasion of our privacy ever. We believe there is the potential for enormous government and consumer push-back in this arena, and that a lucrative business for the future may be protecting and securing the online privacy of individuals and private businesses.

Einstein said that there are only two ways to live one’s life—one as if nothing is a miracle, and the other is as if EVERYTHING is a miracle. If more people appreciated this statement, perhaps we would have a kinder and gentler world.

The markets have rallied in January. As American companies exhibit good earnings growth and strong balance sheets, the markets have discounted the issues occupying the front pages. The American economy is growing slowly, but clearly, as the Federal Reserve Bank and recent economic statistics have indicated, the tonic of low interest rates at least until 2014 will be essential in helping to cure the housing crisis.

If a 2% dividend yield on the S&P 500 companies could be added to a rate of approximately 5% profit growth, it may not be unrealistic for the stock market to deliver 6-8% annual returns in a decade of low growth.

If the dollar resumes its downward trend, foreign earnings may be boosted by currency exchanges back into cheaper dollars. This could also boost earnings, and not insubstantially.

Bonds are another story. It is now all about timing. At some point, longer term bonds, and perhaps all bonds, will experience the blunt edge of rising interest rates. If one is just clipping coupons that’s one thing, but younger investors do not want to get caught in this squeeze. Be mindful and cautious not to be overly exposed unless you are older and the income from these instruments is all you need.

As we have stressed in the past, please make sure that your investment plan is one that you can handle emotionally. The volatility of these markets can create fear, which can be an investor’s friend if used prudently and in a measured fashion. When others are greedy, it is usually a good time to sell—and when others are fearful, it is usually a good time to buy.

The presidential election may render Congress irrelevant for the balance of the year. Businesses want regulation that allows them to function. That is fair. It is also fair that the rich pay their fair share of taxes, but critical that government functions so that all taxpayers feel that their tax monies are being used efficiently and wisely. Do you? (And have you ever?)

It is critical that we all participate in our democracy. Each of us can and are obliged to speak up. Do it before it is too late… don’t accuse Congress of negligence and be a negligent citizen.

In the fourth quarter of 2011, there was 20% growth in investment in residential and commercial real estate; 4.7% growth in the exports of goods and services; 4.4% growth in imports of goods and services; 2% growth in household spending on goods and services and government spending was down 4.6%. None of these growth rates that contribute to GDP have improved enough to make up for growth lost in our last recession. Nevertheless, we are making slow progress, and it will take, in our view, much of the decade to get back on our feet.

Americans will need patience, a trait it is not easy to have in our instant-gratification society. Perhaps though, the adversity we face will bring a reinstatement of the qualities that have made this country great in the past. We view this as a positive for the moral fiber of this nation. The question is, can we get there with a smile on the faces of an overwhelming majority of our citizens?

We believe that the journey, in the end, will be more than worth taking.

Spring is, as of today’s writing, 49 days away! Be positive. Have a great month.

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