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| Thus, we think White Knuckle Hour has passed, and though perhaps it’s too early for Happy Hour, we’re focusing more on the bright side. We won’t say the risks are gone: they’re not; there will be bumps along the way; and lightning does strike out of a clear blue sky. Yet we believe the most reasonable expectation is for a return to normalcy. |
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| January 21, 2010 |
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| January 21, 2010 |
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January 21, 2010
As we enter 2010, let’s just say we’re thankful to exit a decade whose soured economics, divisive politics, and cataclysmic events won’t be missed. Though our optimism may seem misguided to some, what we see in the rearview mirror makes the view ahead look pretty decent. So the skinny is that we feel prospects warrant more exposure for stocks, less for bonds, and pushing cash reserves closer to normal levels.
In recent months, the hard news has countered all expectations. First, the markets reversed the Financial Armageddon Discount and then the whole “don’t waste a good crisis” rush of government ambition stalled on the reality that neither our public nor our foreign creditors would supply the juice needed for Uncle Sam to make “it” happen -- whatever “it” is. Added to this, inflation remains more myth than reality as dominant trends toward lower costs and lower taxes inexorably steamroller most efforts to stem or reverse their course. Finally, expansion of trade and peaceful development proffer the prospect of an era of even cheaper energy, innovative sustainable technologies, quantum engineering and biotech far beyond the bounds of traditional thinking. And these are all good things.
Thus, we think White Knuckle Hour has passed, and though perhaps it’s too early for Happy Hour, we’re focusing more on the bright side. We won’t say the risks are gone: they’re not; there will be bumps along the way; and lightning does strike out of a clear blue sky. Yet we believe the most reasonable expectation is for a return to normalcy. And yes, the Bush tax cuts will expire; interest rates will rise toward normal; the Fed will tighten the money supply; and high unemployment will linger. But none of these seem sufficient on their own to derail a sustainable global expansion as long as policies follow a modest, rational course. And to repeat, the good news is that this seems increasingly likely.
This brings us to stocks. We note that this marks the second cycle to begin overseas, accelerate rapidly, and draw the U.S. into recovery rather than the other way round. Not only is it nice to be freed of another Cold War burden, but without another stimulus, we’ve already seen margins expand, positive earnings surprises, and a pick-up in mergers and acquisitions. As a result we’re not just comfortable with opportunities in North America, but also in the emerged markets of Brazil, India, Israel, and China, and will continue pressing exposure internationally on this basis. And now, with the market’s shift toward our Quality Growth issues and the rising productivity of our buy-sell decisions, we feel pretty good that efforts to expand participation will prove out.
With bonds, the picture is less clear. Money market returns and short bond yields are still abysmal, and the option of extending maturity or swapping into the corporate sector offers mixed prospects at best. The good news is that as rates head back to normal these pressures should diminish. The bad news isn’t just that this hasn’t already happened, but that credit quality has slipped across the board. Add to this the problems inherent in a relative shortage of tax-exempts and an over-abundance of U.S. Treasury and affiliated offerings, and you have a picture of why our appetite for bonds remains limited.
Summing up, though the picture may sound too good to be true, it’s simply a reasonable expectation for a normal expansion. Debt overhang will likely keep U.S. growth muted, but as investors, we’re no longer tied to the U.S. alone. Decline in the dollar will continue to expand our export incomes. But as you know, we’ve never married an optimistic expectation, and we don’t expect to begin now. Our game plan, like all others is subject to change. But you’ve got to start somewhere.
As always, take a look at your reports, and feel free to give us a call to discuss your portfolio. Please accept our continued thanks for your loyalty and support. It is indeed an honor to be entrusted with your savings, to have stewarded you through another of the battles for investment survival, and to have the opportunity to compete in a very tough game.
In compliance with Rule 204-2(a) of the Investment Advisors Act of 1940, we hereby offer our current Form ADV Part II as filed with the Securities and Exchange Commission through notice of its public posting on our website (www.carderockcapital.com); alternatively, you may call to request postal delivery of a hard copy for your records.
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