Capital Ideas Newsletters


Super Mario

July/August 2012

European Central Bank President Mario Draghi announced that the bank would do anything to keep the Euro alive and well. How about specifics, please?

We have heard so much discussion from Washington and Brussels about how they intend to save the economies of the U.S. and Europe. In the meantime, the rest of the world is watching them waste precious time. Corporations managed by good men moved forward by adapting to the new world orders. Why is it that politicians have lost the art of leading!?

The markets may pause while the Olympic Games are taking everyone’s attention from the real world. In the autumn, Spain and Greece will move center stage once more. There are also the market pressures of the U.S. elections where the markets clearly favor the Republican’s certain choice, Governor Romney.

Governor Romney began the Olympics by insulting our British allies. He will have to do much better to win in November. (As I write this, we are 100 days away from the Presidential election!) Actually, the U.S. and Europe have invented a new Olympic sport—it is called kicking the can down the road!!!

Interest rates are at all-time lows. Yes, they can go lower, but rates on mortgages are not likely to go much lower no matter what. If you are refinancing, go for the longest term practical. The debate on Obamacare continues… so much could have been done to improve on the legislation that was passed, particularly in the cost containment area. We are “sick” about the state of healthcare in this country.

Stockton, California filed for bankruptcy protection; San Bernardino and Mammoth Lakes followed. The bondholders of these cities were expected to take losses as property tax receipts fell and costs for retiree healthcare and pensions swelled. Warren Buffett said that the reduced stigma attached to these bankruptcies make it likely that other municipalities will follow.

The slowdown in U.S. growth is adding to fears that another recession could occur. Second quarter GDP rose 1.5% year over year. This rate is widely believed to be too anemic to bring about the job growth that is sorely needed. Mort Zuckerman, Chairman of U.S. News and World Report, pointed out recently that fewer Americans are working today than in 2000, despite the fact that our labor force has grown by 11.4 million. Discouraged workers who have dropped out of the labor market since the 2008 recession, coupled with large numbers of part-time workers with no benefits, explain this phenomenon.

It is also believed that the Federal Reserve will act because of the anemic growth. Is there a QE 3 in our future? We believe that the Fed will continue to encourage the markets with strong talk of continued low interest rates and potential support. If the economy stalls, we believe the Fed will put more pressure on Congress to produce pro-growth legislation. Mr. Bernanke, however, cannot produce much more in the way of growth without leadership from Congress and the executive branch.

JP Morgan was finally humanized by the revelation of its trading losses. Sandy Weill, the creator of Citigroup as we know it, came on television last week to say that he was wrong, and that big banks should be broken up into commercial and investment banks. This is the same Sandy Weill who lobbied to repeal the Glass-Steagall Act! Well, thank you very little Mr. Weill. Please stay retired. Jamie Dimon, Mr. Weill’s protégé, was heretofore viewed as the best banker in the country. What we learn from this is that things work until they don’t. Unintended consequences are often more powerful than the intended ones.

Mike Tyson once said, “Everyone has a plan until they get punched in the face.” Isn’t that the truth?

Our focus must be on producing legislation and policies that provoke change. One may argue about methodology, but we believe that Mayor Bloomberg has been out front and candid about the issues we face. Obviously, with the recent murders in New York City and rampage in Colorado, gun control is at the top of the list.

Aren’t you tired of hearing about the “fiscal cliff”? Why can’t we have an adult debate in Congress and discuss the issues and resolve them without the total politicization of this and all of our nation’s pressing issues?

Whatever happens in the U.S. and Europe, one thing is certain—the world is searching for leadership. It desperately needs it. The danger is that if circumstances become dire, a very bad or potentially dangerous leader could emerge. We must also be vigilant about this, but more importantly, we cannot and must not let that happen. That is why I have written repeatedly that we as U.S. citizens MUST get involved in the direction of the country.

The future is very bright for America. Our energy resources are being exploited like never before, and our water resources are the envy of the world. What is missing is the proper road map.

The markets have responded well to corporate results. Construction and home improvement boosted growth in the second quarter, but more slowly than in the first. Software and equipment purchases by corporations also remained a bright spot. Spending on durable goods and cars was a definite weak area for consumer spending.

We are not surprised at the market’s recent strength because good companies with strong balance sheets, in many cases, are paying bigger dividends than bonds are paying in interest. With the almost certain continued printing of money, getting principal back from a bond with a fixed coupon is looking less and less attractive. At some point, inflation is likely to take hold and rising dividends will protect the equity holders, whereas bondholders will be stuck with a fixed coupon.

As always, remember to contact us with any update on your financial situation or of any changes in your status. Keeping your allocation current is as important as knowing your concerns.

“Interesting Times” these truly are… we could all use a little more certainty and predictability now, but as we have all learned, the only constant is change.

Enjoy the rest of the summer!

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