“We could see a statistical recovery but a human recession” – Indira Noori, CEO Pepsico, quoting Lawrence Summers, Director, White House Economic Council, on CNBC TV, March 22, 2010
Consider that one year ago, Bailout Nation was gaining speed, with huge subsidies provided to a gasping banking system, insurance giant AIG accepting its fourth bailout from Uncle Sam and two of the three remaining US car makers careening toward oblivion. Every Friday, new bank closures were announced. Having lost the argument in late 2008 that no bailouts were appropriate, those who believe in less not more government were ringing their hands in dismay, certain that financial and social disaster lay ahead. On March 3, 2009 an editorial in the Wall street Journal accused the Obama administration of frightening business away from new spending with its threats of health care reform and a carbon tax to curb global warming. The following graph was offered as proof that the new administration was a disaster for our economy:
“We could see a statistical recovery but a human recession” – Indira Noori, CEO Pepsico, quoting Lawrence Summers, Director White House Economic Council, on CNBC TV, March 22, 2010
Consider that one year ago, Bailout Nation was gaining speed, with huge subsidies provided to a gasping banking system, insurance giant AIG accepting its fourth bailout from Uncle Sam and two of the three remaining US car makers careening toward oblivion. Every Friday, new bank closures were announced. Having lost the argument in late 2008 that no bailouts were appropriate, those who believe in less, not more government were ringing their hands in dismay, certain that financial and social disaster lay ahead. On March 3, 2009 an editorial in the Wall street Journal accused the Obama administration of frightening business away from new spending with its threats of health care reform and a carbon tax to curb global warming. The graph to the right was offered as proof that the new administration was a disaster for our economy:
While somewhat comforted by the traditionalist economic team selected by the President, such as Larry Summers quoted at the opening of this article, I was seeking perspective on government intervention in markets, reading a conservative’s view of the Great Depression (The Forgotten Man a New History of the Great Depression, by Amity Schlaes, © 2007 Harper Collins) to remind myself of the mistakes then made by the Federal Reserve and a financially naive Presidential administration in the early 1930’s. Some months earlier, I’d read The World is Curved, in which David Smick argued that regulation of derivatives would stifle economic growth around the planet and drive financial business away from the United States.
A year ago, real estate prices were spiraling down with no end in sight and the same seemed true of the stock market. The Dow Jones Industrial Average had dropped below 7,000 for the first time since 1997. The only thing yours truly felt comfortable buying was bonds, both corporate and revenue bonds (tied to a specific revenue source), which offered huge yields at the time. I reflected on the deflation that was a feature of during the Great Depression, and realized that we might be entering such an era. Bond yields of 7%, 8% or 9% would seem like a flow of milk and honey in such an environment. Even then, I approached these purchases with trepidation, and bought what appeared to be strong issues only after doing extensive homework . For example, a year ago there was serious talk that General Electric would default. The result was that their bonds were clogging the system, sitting in broker inventories for weeks, offering a yields of 8- 9%. I remember that in March 2009, CBS’s 60 Minutes was given access to Fed Chairman Ben Bernanke and a tour of the rarely seen Federal Reserve deliberation chambers, in an effort to bolster lagging support for the embattled central banker.
Well, here we are at the end of March 2010: aren’t there still many problems to overcome? Heaven’s yes -Last week Goldman Sachs predicted that high unemployment levels will remain through the end of 2011. With many economic indicators turning, this appears to support the notion of “statistical recovery but human recession”. Business, especially here in the West where social programs and worker rights discourage hiring, are seeking every possible way to support renewed growth without hiring or re-hiring. This means increased reliance on technology, one reason we owned IBM for a time in 2009 and currently hold Oracle and Apple for our more risk accepting accounts. But the worries plaguing business people and investors are not baseless: We have a government piling on record amounts of debt and in danger of losing its “AAA” credit rating. The current administration has engaged in anti-Wall Street diatribes. We are mired in a costly war in the Middle East. Any day, a terrorist could unleash a disaster worse than 9/11. Iran may soon have The Bomb. We have millions of Baby Boomers reaching retirement each year with Medicare and to a lesser degree, Social Security, underfunded. There is a $2TT unfunded pension liability for public employees at the State and local levels and some 35 states are struggling to balance their budgets. For those who lack confidence in the Federal government’s ability to manage its financial affairs, newly enacted health care legislation threatens to become a monstrous financial burden on future generations that will result in higher taxes, usually a drag upon economic activity . Internationally, Europe appears unable to deal with its own debt crises (Greece, Spain) while oil prices remain stubbornly high as Asian demand offsets decreased consumption in the West.
So why has one measure of economic activity, the stock market, experienced its best bear market recovery year in half a century? The Dow Jones Industrial Average was up some 60% on the anniversary of its lows of early March, 2009… with barely a 10% correction!
In the past couple of weeks, one client handed me an article predicting a major financial meltdown. Another forwarded an online article “What or Who is Driving up Prices?” (Yahoo on or about March 17.2010) suggesting that an obscure Federal committee has been manipulating stock prices far beyond what one would expect from a normal rally. Apparently a significant, brand new tax will be imposed on the Investing Class to pay for Healthcare reform. To quote Bloomberg news service,(March 22, 2010) “The legislation would for the first time apply Medicare taxes to investment income received by
We, in this industry are daily bombarded with contradictory opinions, all from worthy sources. Approximately 12 years ago, After over two decades of hearing financial“experts” contradict one another, I came to the following conclusion: Own good businesses, and stop using economic predictions as the foundation for investment decisions. This, in a single phrase is pretty much what the Greats like Warren Buffet practice. Of course, identifying superior businesses takes skill and a lot of experience. My personal experience has taught me to be patient when buying stock in a great business and even more patient when market forces cause the stock price to decline. Admittedly, I got spooked out of a few good holdings like Diageo and Oracle during the market’s decline. I sold IBM too soon, last summer. But by and large we stuck to our quality holdings and began deploying cash into bargains at a time when other investment advisors were shivering under the weight of doom and gloom Big Picture predictions
While espousing a value investing philosophy, whose foundation is to buy good businesses on the cheap and pretty much ignore “Mr. Market “(Ben Graham’s epithet for the panicky Crowd). I also pay attention to the tone of the market…and this is where the Art of Investing comes in. I’ve just completed Andre Agassi’s biography Open. Agassi talks of turning off his analytical mind and simply feeling the game as it ebbs and sways. While I rely primarily on intellect and quantitative analysis, there is an unmistakable feel to market behavior, something I sense from my earliest days as a commodity trader and analysts, right through the bull and bear markets that have washed over our economy in the 1970’s, 1980’s, 1990’s and into the current century. I give this factor credit in our clients’ success during what has been on of the most volatile epics in world finance. Our clients held their highest allocation to plain old cash when huge bargains in stocks and bonds became available after the September 2008 Bank Panic. It meant we could nibble at good companies in October 2008 and commit extensively to bonds and preferred stocks during late 2008 and into mid 2009 when yields reached their peak. I was as unsure as anyone when a bottom was put in March 2009, but suspected the worst had passed about then (the headlines were terribly negative). However I did not become more committed to stocks until mid Summer of last year when the markets offered a meaningful technical signal of bullishness, even as many Big Picture economists (Nouriel Rubini comes to mind) continued to forsee the end to life as we’ve known it in the West.
As we approach another quarter’s end, I will assure you that none of my clients have seen their accounts rise by 60% since this month last year. None of them expected this. In fact, I have consistently indicated that in a runaway bull market (yes, that’s what we seem to be in), our Balanced /Value approach will appear to “under perform”. With the perspective of one year’s hindsight, the business press will no doubt identify a handful of mutual funds that caught the Wave. There is always some kamikaze money manager who rolls the dice and happens to look smart for a short period of time. (A broken clock is right two times per day, yes?). But seasoned investors are aware that performance must be measured over meaningful, longer periods of time. Let us recall that the US Stock market is down by 25% since the all time high of October 2007, not three years ago. Our clients have been pretty much regained their account values from that time, and did not suffer the gut wrenching collapse in their net worth experienced by the vast majority of investors, just one year ago. As always, we remind you that we see our # 1 job as protecting what you have when times are tough. Then, when the Bulls commence charging again, we don’t need to take big gambles in a mad dash to catch up.
So what is the Definitive Prediction for The Economy from Trusted Financial?
My gut tells me we are in the midst of a remarkable bull market. Why? Simply because there are many signs that commerce is picking up. These include indicators of deliveries to US ports, truck lot volumes and other anecdotal evidence: restaurants seem a bit more crowded. Hotel deals a little harder to find, more cars on the road, more travel bookings for this summer. Best of all, no one is overly optimistic: many intelligent, capable people are still feeling cautious. Recall the phrase: “the Market climbs a Wall of Worry”? There are plenty of people still worried. I suspect this is good for the market. The “tape” has been supportive as well-small corrections, met by a consistent flow of new money coming into the market. As ennumerated above, a slew of negatives is being ignored. There are no big hot trends, no euphoria, no one bragging about their winnings at parties. Finally, for better or worse, there is still a lot of Federal money, appropriated in early 2009, yet to be spent. I’m optimistic, but as always, ready to change my opinion as evidence suggests I’m wrong. Humility is the only sure thing I’ve learned from 36 years of market watching.
I do know that you, dear client, have a stake in some great businesses, both their stock and their debt. Where a third party manger (i.e. mutual fund) brings expertise I cannot provide, some of your funds have been placed in those good hands. You will find me becoming neither euphoric in a bull market nor despondent in a Bear. I sleep at night and so can you too, knowing your investments are backed by strong cash flows, unique competitive advantages and excellent management.
That’s my story, and I’m stickin’ to it!
Gary E. Miller, CFP
