Kevin Day believes that the next six weeks will be particularly weak, however, he believes that the stock market will end the year in a classic Santa Claus rally, fueled by great corporate earnings figures. Fundamentals, ultimately, will drive the stock prices up and that is currently not being reflected in the market, which is preoccupied with bearish sentiment from the precarious situation in Europe.
It is also time, as stated before in this blog, to start nibbling on the financials and emerging markets. In the financial sector, it is prudent to pay particular attention to Wells Fargo and JP Morgan Chase.
Tommy Schultze, who works for Sysco Systems, the foodservice company, (not to be confused with Cisco Systems, the router company), mentioned how this coming year will bring forth much higher national beef prices due to a drought in Texas this year. A good chuck of the nation’s beef comes from Texas and as the supply will be lower, the prices will go up.
However, he believes that it will take upwards to 6 months before the effect of the drought will hit the market. He also believes that the rise in beef prices will drive up the prices of animal feed, corn, and wheat as well.
The“S” Word
Kevin is worried that the recent economic statistics give him cause to believe that stagflation may be rearing its head for the U.S. economy, wherein inflation remains high, while economic growth remains low. In this environment, it is possible for corporations to do very well, while not creating much job growth and therefore unemployment remains high.
This is the very environment the U.S. faced in the 1970s. Some economists attributed this economy to Richard Nixon’s imposition of wage and price controls which caused an upward spiral of commodity prices. Whatever the cause may be, the result was that the market travelled nowhere for a decade.
Kevin feels that if the current environment remains, then we may be facing just that.
Operation Twist
Jeff Harrington was explaining “Operation Twist” to the rest of us, a program rolled out recently by the Federal Reserve. The objective is to make long-term interest rates even lower to make refinancing and purchasing homes even more attractive to consumers. Mr. Bernanke believes that this will stimulate the housing market, which, according to him, is the key to getting unemployment and the overall economy back on track.
Basically, those short-term and medium-term bonds that become due over the next few years, the Fed will decide to buy longer-term bonds, thus driving the long-term mortgage rates, usually tied to the 10-year Treasury rate, down.
The impact that this may have is debatable. A similar strategy was employed in the 1960s and the results were miniscule. Furthermore, rates are already very low, so it is questionable how much lower they can go.
The Overall Economic Picture
From what the economic data is telling us, we may be pulling ourselves out of this economic bog that we have been in since late 2007.
Finally, the U.S. government is talking about austerity measure to start paying down our enormous debtload. Even in those circles that believed that we could spend our way out are beginning to reconsider that strategy for the long-term.
If Congress is able to reverse this strategy in place currently, then the long-term security and full faith and credit of the U.S. government will have been on the path to restoration.
It also looks like, the commercial real estate bubble, which was slated to be the next shoe to drop, will be averted. However, this does not mean that the current residential real estate tangle will be resolved soon. That recovery may very well take many years, but the important thing is that the bleeding is stopping.
Once housing makes a turn, it is probable that unemployment will go down due to the rebound in construction and manufacturing and hopefully, it we will be back to business usual.
The Virtual Economy
VJ Arjan remarked how as the world becomes more remote and mobile that the need for physical office space is becoming outmoded. For instance, Blockbuster, a company that had been around for 30 years, just filed bankruptcy last year as the consumer’s needs and conveniences changed. Netflix, which has not one physical store, is now the leader in that field. It delivered DVD’s by mail and is now delivering digital content to computers directly from the internet.
Physical banking locations are also going out of business. Now there are online banks that will pay for ATM fees and have no maintenance charges. These seem to becoming more the norm and fewer and fewer people are visiting a physical branch location.
Pretty soon, we won’t even have a physical office to work from. All we will have is a phone and a laptop that we can plug in from our home.
Potential Market Plays
Superior Uniforms - manufacturer and distributor of uniforms; solid company with a 4.5% dividend yield
On October 5th, 2011, we heard the terrible news of the death of Steve Jobs. He was one of three legends (the other two being Steve Wozniak and Bill Gates) that created the personal computing industry and revolutionized an era.
Steve was a genius on many fronts:
He was a brilliant visionary in the technological field, able to detect and forecast trends years and even decades before others caught on.
He had an incredible ability to market and create a brand loyalty unsurpassed by few brands in the world today.
And it was a pleasure to see him sell the world at his Mac World conferences on the greatness of his products; first the Mac, then the iPod, then the iPhone, and then the iPad.
Hopefully we will see his legacy pass on to the Apple management team in place today with Tim Cook in charge.
It was a pleasure to watch you, Steve. You will be missed.
The next meeting will be on Sunday, November 6th, 2011. For those who have not attended ameeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com.
Also I find that there are many domestic and internationalreaders who are following our blog posts not only in the United States but allover the world including Europe, Latin America, and Asia. If you wish to be added to our email list,please email at scarletkings@gmail.com.
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