Investment Reflections
Email This Article Ron RothJanuary 13th, 2010
GLANCING BACK AT 2009…
Reveals a year ripe with contradictions. The Dow Jones Industrial Average surrendered over a third of its value in the first ten weeks of the year, while the S&P 500 gave up 31%. Thankfully, on March 9 both indices reversed course, and except for a few minor mini corrections, headed higher for the remainder of the year… finishing 2009 with our benchmark, (the S&P 500) ahead by 23.45%. These musings are written in the first hours of the first trading day of the New Year, and the market bias continues to point higher.
The economy will be facing problems galore, and our challenge will be to anticipate trouble, and react. Fortunately, even the most daunting problems often conceal enormous opportunities. For instance… Federal spending is at the highest level since World War II, and the Congressional Budget Office suggests that US government debt will approach 70 percent of GDP over the new decade. Undoubtedly, the US dollar will continue to fall. Producers of natural resources (oil, gas, steel, aluminum, copper, gold, etc.) will raise their prices to compensate for the fall in the value of the US Currency. That should translate into enormous profits for investors in Natural Resources. We most certainly plan to be among them.
KEEPING A GLOBAL PERSPECTIVE
As the dollar falls, key overseas currencies will have to rise in value. Our research has led us to Australia, China, and Brazil, arguably, the strongest economies in the world at this time. We are currently invested in all three, and look to increase our positions as 2010 unfolds.
Here at home, the economy will most likely be suffering from higher interest rates as lenders seek to protect themselves from the crumbling dollar. Welcome to the world of TIPS (Treasury Inflation Protected Securities). As we outlined in our October letter, TIPS are US Treasury long-term bonds that are pegged to the official rate of inflation. Every six months the face value of the bond, as well as the interest rate of the bond, is adjusted upward in sync with the inflation rate. As we wrote earlier, trouble is often packaged with opportunity. For the moment, prices are stable, and inflation is sleeping. It will have its day soon enough, and TIPS will serve as our first line of defense.
BELIEVING IN OURSELVES
It saddens us to see the US’s industrial base gradually eroded away by foreign producers and uncompetitive domestic wage standards, but we suspect that as the economy revives, American ingenuity will stage a revival, and we’ll witness more and more factory doors swinging open. Admittedly, these statements are based more on hope than any concrete evidence, but aren’t hope and hard work a cornerstone of our country’s history?
Be that as it may, there are a number of sectors in our economy that are demonstrating enormous resilience. Technology is probably the best example. Innovation is rampant. Productivity advances are breathing new life into major companies. Ever smaller components with infinitely complex capabilities are spawning new industries. (nanotechnology) Major new product development is still, for the most part, a product of American ingenuity. The recession slowed things somewhat, but the word is out… America is back. Whether we’re talking about IBM, or a Missoula start up, we’ve got the knowhow… we’ve got the imagination. The world comes to us for new ideas. We go to it for less costly production. Technology is definitely a place to be. The rush has already started.
ALSO OF INTEREST
Oil is back to $80, and threatening to go higher. That comes under the heading of good news/bad news. Higher energy prices could trip up a recovery, but enrich investors. We are over weighted in the sector, and still adding to our positions. Our most recent addition is the Brazilian oil giant Petrobras… our intention being to profit from the company’s huge deep water discoveries, while also benefiting from Brazil’s strengthening currency. And parenthetically, the only way the Petrobras folks are going to get that oil up from the wells that must be developed thousands of feet below the ocean’s surface, is to employ American or Norwegian deep water drillers. We (you) own a couple of those as well.
ANYTHING THAT HELD US BACK THIS PAST YEAR?
For sure! When the present administration took office, their first order of business was a stimulus package that would focus on rebuilding the country’s failing infrastructure. We were excited by the prospect of blending an infusion of cash into a troubled economy via an upgrading of our highways, domestic water systems, and electrical grid. These systems had been built out way over sixty years ago and are obsolete at best. We celebrated what we considered the administration’s wise commitment by purchasing two or three well known, and well financed, construction companies. i.e. Fluor, Jacobs Engineering Group.
The bill that came out of Congress had little resemblance to what the public had expected. At best there was the likelihood of 8% to 10% of the appropriation being directed to infrastructure. It would appear that only a dollop of those monies have been put to work. Bottom line:…the companies we had bought in anticipation of the build out suffered substantial losses. What might have been a brilliant year, turned into a damn good one. Such is the nature of our labors.