Capital Ideas Newsletters


A Rising Tide

March/April 2012

…does lift all boats. At this point, even rising interest rates are lifting boats as we have watched the ten-year treasury note rise in yield (not price) from 1.95% on January 1, 2012 to 2.246% as of this writing. Although interest rates are higher than they were at the beginning of the year, they remain historically very low.

Americans are buying more homes this year than in 2011. The Wall Street Journal reports that the pending home sales index was up 9.2% in February from the same month last year.

Good news, and Federal Reserve Board Chairman Ben Bernanke’s comments regarding keeping interest rates low until 2014 buoyed the market month end.

A relief rally in global markets occurred after the Euro stayed intact. This resulted in impressive gains with the S&P 500 index advancing and even Germany rallying 17%.

The best performing market sector was American banks as a group, gaining 26% in the first quarter. Despite that, three major U.S. banks – Morgan Stanley, Bank of America and Citigroup may be downgraded by Moody’s Investor Services. This may present an opportunity to buy the debt and preferred securities of these issuers.

Currently, the Italian ten-year government bond yields 7.104% – that is roughly five percentage points more than a U.S. ten-year government bond yields. If both countries are ultimately backed by a printing press, how much of a difference is there really? We shall see.

The world “feels” like it is heading for repair, with the exception of China, which is being “talked up” as a slowdown story for 2012.

Is it any surprise that Apple’s supplier in China, Foxconn, was found in violation of labor practices. We believe that there are many similar violations worldwide.

The markets are trading at reasonable valuations right now given what investors can receive in bond interest. Savers are being forced into high-quality equities, but the rally seems to be running out of steam. The market may take a breather due to valuations and investor reluctance to get in after the run. We say “may” because momentum usually swings the pendulum to excesses on the upside and downside of the market.

The world has moved from wide lens to a narrower and narrower viewpoint. We recently heard a comic remark that the great magazine of the day has gone from “Look” to “People” to “Us,” and now to “Self.”

In a paradoxical way, that seems complimentary to the technology that has evolved and clearly the “me” is in, and the “group” is out. Just look at the annoyed fellow train/plane passenger on his “device” as you dare introduce yourself!

One of the best things for this nation is to have an active population. People should not stop growing. Albert Einstein said, “Intellectual growth should commence at birth and cease only at death.”

The price of oil is dominating the news, and there is no doubt that gasoline prices could put a damper on the fragile recovery. We do not believe, however, that the current spike in prices is cause to use the strategic petroleum reserve.

“The Election” means the government will be less likely to stick its neck out. This may be a net positive for the markets. Stay vigilant, however, because the waters have been so calm (and the weather so good!) that we are due for a storm.

Enjoy the holiday and the spring!

John Locke, the famous English philosopher, said, “It is one thing to show a man that he is in error, and another to put him in possession of the truth.”

If only the world’s politicians would follow this credo… but could we really handle the truth?

‘Til May/June,

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