Inflation, despite historically high deficits, stubbornly refuses to rise to the Fed’s relatively modest target of a mere 2%. In our last report, we noted that the Fed was finally ready to “stand pat” on further interest rate increases. We also addressed the importance of the yield curve in predicting future economic growth. At the time it was partially inverted (indicating an economic slowdown) due to the Fed’s aggressive interest rate increases last year. Since then, commodity and energy prices have modestly declined and labor costs have been rock steady. This week the Fed Continue reading 2nd Quarter Update Summary – Soft Landing?
We continue to focus on the growth of the economy and the one variable of greatest impact on economic growth, interest rates and money supply. Fortunately, the markets rebounded and weathered quite well the Fed’s aggressive interest rate increases of the past year. In December, the month of the last rate increase, the markets were Continue reading 1st Quarter Update Summary – Stand Pat?
Our accounts turned in exceptional performance this year with positive returns while the market indexes were all down for the year. Our largest holding, Amazon, was up 28.4% and contributed substantially to those gains. The merger of our second largest holding Oclaro, was a 24% gain for the year and was completed in December with a cash payout together with Lumenthum stock. Consequently we are starting this year with large cash balances in a tumultuous market environment.
As you are likely aware, there are several important issues (shutdown, Brexit, tariff trade disputes, etc.) that all could significantly Continue reading Year-end Summary 2018
While the Fed continues to increase short-term interest rates as the economy chugs along, we had a new wrinkle appear this quarter. Previously, long-term rates remained relatively stable as short-term rates rose. This had the effect of a flattening of the term structure of the yield curve, an indicator that future growth may slow. This month however, those stable long-term interest rates have begun to rise sharply in pace with short-term rates controlled by the Fed. The cause of this is quite unknowable at this point, but we note that oil and some commodity prices have been rising together with wage increases finally showing signs of life. The takeaway here is that the economy remains robust and that a slowdown or recession does not Continue reading 3rd Quarter Update Summary – The Economy Chugs Along, But Whither the Markets?
Last quarter, the markets largely stabilized in an upward trend again following a rambunctious first quarter. Amazon continues its upward surge and Oclaro stockholders last week overwhelmingly approved the merger with Lumentum which will be completed in a few months in a distribution of both cash and Lumentum stock. The capital gains and tax effects of the merger are still not clear.
We continue to focus on monetary policy. The Fed continues to raise short-term interest rates but long-term interest rates, largely controlled by market forces, remain quite stable resulting in a flattening of the yield curve. A flat, or worse yet, an inverted yield curve is a proven precursor to Continue reading 2nd Quarter Update Summary
Despite the fact that the markets began the year in verifiably volatile fashion, they wrapped up the first quarter about where they began. Despite this however, our accounts successfully turned in significant gains for the quarter. This was due primarily to our two largest holdings: Amazon was up 19% and Oclaro was up 45% due to a buyout merger offer from Lumentum Holdings, a leading-edge fiber optic provider. The buyout offer of part cash and part Lumentum stock will likely be completed within a few months. We do not yet know the tax effects of this transaction.
The economy appears to be moving forward on firm footing. Although the current economic cycle is one of the longest on record, economic growth cycles normally don’t merely die of old age and recessions usually have specific causes. This growth cycle, with the recent tax cut and approval of the federal budget containing a sizeable deficit, now has these two additional growth stimuli to continue the expansion. Our economy has yet to explore Continue reading 1st Quarter Update Summary
The market meltdown in the previous few days was unmistakably a reaction to sharply rising bond yields which previously were rising slowly if at all in response to Fed rate increases. It was not likely a response to inflationary fears as leading inflation indicators (metals and commodities) were unmoved if not down. Add it all together and present value theory of stock prices required a downward move in prices in response to those bond yields. The consequence? The Fed, now chaired by a Wall Street insider, has no reason to be too aggressive in raising short rates and may even temper its planned sales and reductions of its massive bond portfolio.
Last year the economy and the markets performed well in part due to the fact that the economy is in the midst of an enduring economic expansion. Now with some new fiscal stimulus in the form of comprehensive tax cuts passed by Congress the expansion received an additional boost to extend its life. This provided there are no unfortunate consequential mis-steps by the Administration and Congress in terms of trade (NAFTA, TPP) or foreign relations (Iran, Korea, China). Although the Republicans have, for now, forsaken their historical misplaced concerns regarding Continue reading 2018 Annual Outlook Summary
Despite uncertainties on the stage of global trade and relations, the main concern for investors remains primarily the activities of the Federal Reserve’s monetary policies together with the tax and fiscal plans of the Administration and Congress. The Fed’s plans have been consistent and transparent. The Fed will continue to gradually raise short-term interest rates and will begin to reduce its vast reserve of bond holdings potentially raising longer-term rates. Higher rates are rarely if ever Continue reading 3rd Quarter Update Summary
Anytime a given economy has excess unused labor or plant capacity, deficits and federal spending are essentially mandatory to revive and expand the economy. The greater the excess capacity, the greater federal spending (deficit) is required to employ that excess. The is especially crucial in times of economic stress where private money creation (bank lending) is either dormant or in collapse. In addition, the only constraint on money creation ought to be, and must be, inflation. And inflation, in monetarily sovereign economies generally is not evident in economies with excess labor, plant and resources.
Here’s some background to help you understand a little better:
During the Great Depression, a small recovery had begun in 1936. Unemployment had dropped from Continue reading Do Deficits or National Debt Really Matter? No. But Yes, Only in Rare Circumstances.
Yes. There’s yet another cardinal rule that tells you when to get into the market and when to get out (more or less). It has never failed us and following it, helped us avoid entirely the catastrophic markets last year and turn in positive performance for 2008. You’ve all heard it before but let’s restate it because it’s important and it works. Herewith: “Don’t Fight the Fed!”