Year End 2011


Thoughts and Comments


Economic “News”

Given the large number of important items to cover for December, we will simply list them with some brief details:

1)    Europe is trying to come up with a way to get the ECB to print money without them having to really address spending problems.  No wait, they have been doing that for over a year…

2)    China is lowering bank capital requirements so that they can continue to stimulate growth…no wait, we predicted that last month…

3)    Housing prices continue to fall in China and that is one of the main reasons inflation is down, although food and energy prices continue to stay high… no, forget that, that is old news…

4)    The super-committee was unable to come up with a way to produce the $1.2 billion in savings that Congress couldn’t achieve is past summer…yawn – the real news is finding someone who is surprised by this…

5)    Albert Einstein once defined insanity as doing the same thing over and over again while expecting different results.  Ok, I admit it, I just pulled this from last month’s Thoughts and Comments, and it isn’t a new thought, not even for me…

Okay, I admit this is an exaggeration, but as they say, “many a truth is told in jest.”  The fact is the news continues to confirm the pattern of politicians worldwide trying to spend their way out of debt-related financial problems.

Last week, Italy issued close to €20 billion in debt and struggled to accomplish this.  This year, according to Bloomberg, they need to raise close to €450 billion, most of it in the first half of the year!  Rates are currently just shy of 7% on ten-year notes and over 4% for 2-year notes.

According to the Wall Street Journal, Spain just announced that their budget cuts and tax hikes will not get them to the 6% of GDP target they have been predicting; it will be above 8%.

In the meantime, much of Europe is teetering on the brink of a recession.  Manufacturing numbers just released were down again for the fifth month in a row.

Interestingly, manufacturing in the U.S. reported stronger results, and our personal checks are finding the same. The New York Times reported this past week that U.S. manufacturing, while not at the peaks seen a decade ago, is growing again here at home.  The main driver has been dramatically lower wages for new employees.

Employment numbers were just announced and were better as well.  However, much of this is due to the large number of unemployed workers who have given up trying to find another job.  The bottom line is that the U.S. economy is very slowly recovering, but is still very weak and delicate.

Based on the following information, it is obvious the answer all over the world has been to print more money and we expect this will continue:

1)    In the last two weeks of December the ECB issued over €400 billion to EU countries to stabilize their banks.

2)    China just lowered the reserves banks are required to have for loans.

3)    The Federal Reserve increased their balance sheet to a new high in December by an additional $52 billion.

4)    Brazil lowered the amount of capital banks must hold for loans by 12%.

Is everyone printing money? Check.


A New Year or a New Investment Strategy?

The past year was really difficult for long-term investors.  Market volatility was very high and all of it was driven by the daily news, even though, as we have now pointed out ad nauseam for most of the past twelve months, little economically had changed. Which leads us to reflect on what being a long-term investor really means.

The significant difference between a trader and an investor is time frame. A trader is looking at short periods of time, often as short as seconds or minutes: 48 hours is a lifetime away for many traders.

An investor is thinking in terms of years in order to allow businesses or economies to develop.  In fact, the longer the term on which an investor can focus, the more time can become their friend.  For example, while an individual event, such as a freak storm that leads to flooding, may temporarily drop a stock’s price because the flooding will lead to a shortfall in earnings for a particular quarter, and therefore a trader might sell a stock in such a situation, an investor would regard this as a potential opportunity to buy the stock at a discount if they surmised that the flooding would not cause any long-term effects on earnings or revenues.

Given the market action last year, many stocks were whipped around and yet there was no news specific to them.  In such times, a long-term investor needs to focus on the long- term prospects of the company: the steps the company is taking to grow their company rather than on what the stock price is doing that day.

The results of focusing on the long-term will be twofold: first, it will be less tempting to give in to fear and sell when volatility rises when the stronger strategy is to buy or to sit patiently; and second, it is more likely that you’ll make money in the long run.

Looking Ahead in 2012

We expect more of the same this year.  While the U.S. has slowly seen its economy stabilize, Europe has yet to address their financial issues and China is hiding all of theirs.  We are in the midst of a major deleveraging cycle, one that took over fifty years to build and thus will take some time undo.  This means there will a great deal of volatility as headline new and traders will continues to whip the markets.

A cautious stature makes sense, but let us emphasize this is different from being pessimistic.  For with every problem there is also an opportunity, if one can see it and is patient enough to wait for it.

We are going to continue holding gold and oil stocks, especially those with dividends.  We also like agricultural related and certain specialty chemical companies as well.  All of this still should be mixed with short-term fixed-income securities, as we do not see a logical risk/reward with holding long-term treasuries.

The key will be to continue to be patient and focus on the trends in the marketplace rather than the latest news headline: remember that wealth is created over time, not overnight.

A healthy and prosperous New Year to all of our readers and investors.

Alan E. Rosenfield                                                                                                                       Managing Director

January 2012


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