I was going to title this blog “there is no place like home” as the United States is in far better shape than most of the industrialized world, however, our politicians continue to hold us back from achieving our true potential.
Merck’s Chairman said it best when he commented that the government should focus on the reasons companies try to change their domicile rather than company’s using a tax loophole, inversion, to do it themselves. Our tax policy is outdated and needs to reflect the global landscape so that companies domiciled here can compete on a level playing field worldwide. In addition, our tax policy foolishly precludes companies from repatriating foreign earnings without a stiff penalty which otherwise could be reinvested here. Stop double taxation. And there are many more changes to tax policy, which would stimulate growth, investment and our competitive position. It is time for the politicians to act and stop talking. Executive order is not the way to get things done in a democracy. We all recognize the problem, so solve it once and forever!
It is also bothersome that the government is taking a very hard antitrust line when it comes to mergers which virtually makes large mergers impossible to close. Here, one plus one makes three and enhances the global competitive position of the new combined entity as well as improves its financial outlook. All good, right? Guess not! Our government needs to broaden its horizons reviewing acquisitions and take a more global perspective rather than a narrow domestic one. Look at global competition, global pricing and the impact of the Internet in assessing competition. Stop being so narrow minded. Sounds like the Fed!
I was absolutely incredulous when Fed Governor Rosengren came out earlier in the week and virtually rebutted what Chairman Yellen had said the prior week. I immediately came out with a blog titled “Fed’s Rosengren Has It Wrong” where I said that it is absolutely wrong and confusing to have a Fed Governor saying one thing and the Head of the Fed saying something else. He supported higher rates sooner, which I felt then and still feel now is the wrong policy, as the Fed needs to promote growth, as the U.S. is clearly the engine of the world. What tea leaves is he reading? Does he realize that first quarter growth may be below 1%? And he wants to tighten sooner!!!!
I might add that the Fed minutes that came out the following day, which indicated waiting longer before another rate hike for all the reasons that I have been enumerating for weeks. Who are we to believe? Can we have confidence in a Fed when one member says one thing only to be contradicted a day later by another member?
Have you been watching the yen and euro? Both are rising rather than falling, as their monetary authorities intended, as local residents are taking “Risk Off” as they have no confidence in the BOJ or ECB in stimulating growth any longer. Their concern obviously remains “deflation.” You know my view that negative rates has a negative connotation. Our Fed should take heed!
Now let’s look at the Presidential primaries. Can you believe what is happening with the establishment circling the wagons to put down the newcomers? I feel sorry, in a way, for Trump and Sanders. While I do not agree with their policies, they should be given a fair chance to win their party’s nomination. It’s like a race to the bottom of the barrel rather than rising to the occasion and putting the U.S. and its citizens first. Wake up establishment as the success of Trump and Sanders is directly related to the negative feelings and lack of confidence/trust out there for all old-line politicians who care most about themselves rather than us. “Make America Great” should be more than a slogan. It can be done!
Just like we should look at the reasons why corporations want to domicile overseas, we should look at why people want to elect non-traditional faces owing nothing to the political establishment. We better make changes or fall behind. We need leadership in Washington - people capable of and willing to think out of the box. We need a mindset shift from top to bottom with the country coming first with an understanding of the impact of globalization on all of us.
The irony is that the United States is in pretty decent shape and if left to its own devices will do well enough. But, we can do even better if only we make the needed changes to our tax policy and loosen those regulations that impede growth. The same problems and need for changes exist abroad too. Only China seems to be facing up to the challenges. Change is never easy but a necessity to survive. Ask corporate America!
So let’s take a brief look at key events around the world and then wrap it up with a discussion of investment overview.
Investors seem fixated with every word out of the Fed whether it be the minutes which came out last Wednesday or interviews/speeches given by Fed governors several times each week. Let me state at the outset that while the Fed Funds rate needs to be normalized over time, global problems including lack of growth and deflationary fears remains the over-riding factor in maintaining rates where they are for the meantime. It’s not as if the U.S. economy is humming along and inflationary pressures are building so fast. It’s just the opposite. U.S. growth has slowed down below a 1.0% rate of gain in the first quarter with inflation still below 1.5%.
Let me re-state that the U.S. right now is the engine of growth in the world and the Fed better keep us moving forward, at least at this speed. Raising rates now would send the wrong message and jeopardize what little growth we are forecasting for 2016. It’s absolutely foolish to say that the Fed should raise rates now so they would have room to lower them later if growth slows down. Nonsense!
Economic stats reported last week included: the Bloomberg Consumer Comfort Index eased to 42.6; households’ views of their personal finances fell to 56.0; factory orders declined 1.7% after a 1.2% gain in January; inventories declined in line with shipments; job creation and consumer spending continued to increase; the trade deficit rose 2.6% to $47.06 billion as exports rose 1% while imports increased by 1.3% and finally the service sector index improved in March to 54.5.
We still expect the U.S. economy to bounce back in the second quarter after a sluggish start to the year with growth within the 2-2.5% range and inflation below 1.5% for all of 2016. So, what is the Fed worried about? An overheating economy! Come on now….
The surprise this year could be that corporate profits may exceed earlier forecasts due mainly to a weakening dollar positively impacting translation gains compared to losses last year. I mentioned this point last week and just want to reiterate that view, as it is a key element when looking at valuation and expectations. A positive upside surprise would be nice!
Energy remains the second most watched area for investors. As we mentioned last week, we expect the markets to be very volatile into the meeting of all the major energy producers in a few weeks in Qatari. Prices were weak earlier in the week only to move up strongly into the weekend. If the major producers can announce a deal freezing production at current levels with or without Iran on board, the outlook for energy prices improves as we move through the year as long as demand continues to increase. Let me say once again that I don’t expect a balance in supply/demand until 2017 but the markets anticipate change well ahead of events. I am glad that I covered my energy shorts 6 weeks ago, as you know from my blogs.
Let me quickly review key events in other parts of the world: first the Eurozone: retail sales rose 0.2% month over month in February are up 2.4% year over year; Germany lowered its growth forecast for the year to 1.7% but may be revised again lower due to the recent strength in the Euro; the euro area Markit PMI index rose to 53.1; inflation is forecasted to have risen only 0.3% in the first quarter and finally the unemployment rate fell to 10.3%. In China, the March services index rose to 52.2 in February; however, the employment component fell to 48.9 and finally it appears that monetary easing is bearing fruit boosting growth.
I maintain my view that growth and inflation in Japan and the Eurozone will be below 1.0% this year and negative rates have negative connotations. Growth in China will be between 6-6.5% and India continues to do well, as growth for 2016 will exceed 6.5%. The Emerging Markets have been boosted recently by a weakening dollar and higher commodity prices.
World growth will fall between 2.5-3.0% for 2016.
So let’s wrap this up.
I believe that the monetary authorities have done all that it is in the their power to stimulate growth and now it is up to the politicians to walk the walk and make the needed changes to tax, financial and regulatory policies to stimulate consumption and investment. I realize that there may be some budget shortfalls along the way but it really is the right answer to put wind back in the sails for global growth. Sorry, Germany, but it has to happen as the other option, no growth, is the worse alternative.
Our portfolio is comprised of the best in class measured by market strength, financial strength and, most of all, great management who are implementing plans to succeed in a global competitive environment. Our portfolio is highly diversified. Each of our companies is dominant in their fields, growing volume, investing in the future while still generating excess free cash flow. The average yield of our portfolio exceeds 3.0% (the 10-year treasury ended the week at 1.72%) with dividends growing each year. Even Nucor, a steel company that we own, has grown its dividend each year for the last 38 years, has a great balance sheet, is market dominant, is the low cost producer and has a current yield of 3.2%. Finally the average multiple in our portfolio is less than 15 times 2016 earnings, which is a 15% discount to the market. We remain around 94% net long and continue to outperform all indices.
Remember that this is a market of stocks, not a stock market. I believe active managers should have a distinct advantage in this environment, but they need to be global investors like us.
Remember to review all the facts, take a long pause and reflect on the data, consider the proper asset allocation with risk controls, do in-depth independent research on each investment and …
Invest Accordingly!
