Capital Ideas Newsletters


Snowed In

July/August 2013

The summer surge in the stock market has brought the averages up approximately 20% to date, a significant year by any measure.

More notable is that the interest rate on the U.S. government’s ten year note hit 2.7% in the last week of July — indeed a huge percentage increase in the benchmark interest rate over the past six months.

This situation has caused many investors to question their allocation to bonds. What should be noted is that memories are short in the investing world. Those investors who want a positive return and the preservation of capital (with some portion of their money) should not run from bonds. There is a reason to preserve capital — ask those who are older and wiser. Even Warren Buffett keeps plenty of cash on the Berkshire Hathaway balance sheet.

There was a flood of economic data released last week. What did we learn from it? The unemployment rate dropped from 7.6% to 7.4%, but payroll growth slowed. The issue of the Federal Reserve “tapering” bond purchases has become the focal point of the market.

In June, job growth slowed in both federal and state governments as the sequestration took hold. In the private sector during the same period, construction jobs rose while manufacturing growth slowed. In July, however, those trends reversed. On balance, we see a slow growth of jobs in both housing and manufacturing.

Countries like Indonesia, who have relied on China’s boom for the exporting of its resources, are feeling the pinch as China’s growth rate slows. This could be an issue for growth in the Pacific Basin.

Japan’s devalued Yen is helping its companies. Toyota’s sales are booming — who says that lowering a currency’s value does not help its businesses?

It seems that Europe has stabilized. Now is the time to look at companies that will benefit from Europe’s climb, and we are seeking opportunities.

Detroit’s bankruptcy has had very little “play” in the financial press. It is a very significant event, and we should take notice. Unless we are prepared to take on the unions that are largely responsible for the unsustainable pension and health care benefit costs, there are many more bankruptcies in store for our cities, and perhaps our states too. Only approximately 73% of state pension plans are properly financed. By one recent estimate, the total pension gap for states is $2.7 trillion, or put another way, 17% of U.S. GDP.

We would be remiss if we did not mention the future King of England, His Royal Highness Prince George Alexander Louis. Poor Kate Middleton being photographed by the world a day after giving birth. It may be great to be king, but being princess? Well… I am not so sure.

Look for a great deal of politicking as we move into autumn. New York’s mayoral race will shift into high gear and the debt ceiling debate will, once again, likely bring Democrats and Republicans to serious fencing and finger pointing.

The U.S. is climbing out of the abyss of the last decade and if we can get some responsible tax policy, it might be possible to close the deficit gap while creating good economic policy. This will require leadership on a national scale and, as of yet, we do not see who will provide it. Nevertheless, the darkest hour is always before the dawn.

If President Obama continues to get snowed in by Putin, people like Chris Christie will make fodder of him. We shall see, and that will make the next four months so interesting!

The late Michael Mansfield, former U.S. Congressman, Senator and Democratic majority leader said, “The crisis you have to worry about most is the one you don’t see coming.”

Stay nimble!

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