Capital Ideas Newsletters


The Printers

March/April 2013

Wherever you look, the money just keeps flowing. Optimists believe that a combination of growth and austerity can get us out of this mess. Pessimists… well, they are pessimistic! Someone once told me that a pessimist will say, “Oh boy, things cannot get worse,” whereas an optimist will say, “Oh boy, things can get worse!”

The stock market’s steady climb has given rise to improved confidence as many companies report solid earnings. But, how many of these gains are due to stock buy backs rather than an increase in sales? That is a key question as financial engineering can mask the reality of what is really happening in our economy. It also makes you wonder if our government uses financial engineering in creating the budget…

Although the pace of manufacturing has picked up, of concern is that many companies are issuing negative guidance for earnings. This is a sign for investors to be cautious. After all, the Dow and S&P were up 11.25% and 10.73%, respectively, in the first quarter of the year.

The average U.S. household spent $2,912 on gasoline last year, representing nearly 4% of the average household income before taxes. That is indeed a nice bite out of a paycheck, but interestingly, the U.S. is among the cheapest countries in the world to purchase gasoline.

Some good news to report: as reported in the Wall Street Journal, the average high school advanced placement test scores rose last year for the first time in a decade. Florida had great advances in this category as students in that state received cash bonuses as incentives, once again proving the old adage that “money talks!”

Is capitalism broken? This question was discussed at a series of debates held by the Financial Times in Beijing, Shanghai, and Hong Kong. Our view is that capitalism is alive and well. For proof just look to the 212% rise in global exports since 2000. Contrarians argue that governments rather than private capital have driven much of that expansion. Nevertheless, even though governments have kept markets liquid and flowing, it is the markets themselves that have adjusted to new prices and supply and demand.

It is troubling that Wall Street and investors have been so instrumental in solving the housing crisis by purchasing homes and renting them out as opposed to individuals buying them as primary residences. What this means is that those renters will not be building equity for the future and will likely be more reliant on the government for their retirement. The issue of individual home ownership, the “American Dream,” is critical to address.

As we look to the second quarter and the year ahead, we expect that the sequester, payroll taxes, and income taxes will slow spending somewhat. These may be mitigated by the overall sense that the economy is improving.

Keep an eye on your allocation — take profits when they come easily and make sure that the risks you are taking are digestible in a market correction.

We have all been through an unprecedented time in the economy. Some have weathered it well, and some, well…

Aldous Huxley once said, “Experience is not what happens to you; it’s what you do with what happens to you.”

Enjoy the spring!

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