Spring 2011

Uncle Ben's Converted Mice

The Chairman of the Federal Reserve Bank is nothing if not bold. His nickname before the ascendancy to his current august position was "Helicopter Ben" bestowed upon him for his promise to "throw money from helicopters" should the economy ever descend into a financial crisis. He has been true to his word. QE 2 and prior stimulative measures have added over 1.5 Trillion units to the world's supply of U.S. Dollars which, though not distributed by the Army Air Corps, have made their way into bulging bank reserves and have propelled the stock market to levels not seen since the crisis began.

Printing money is like pushing the economy's "Easy Button", cushioning the immediate effects of the financial meltdown and postponing the day of reckoning to a time when the necessary adjustments can be absorbed by a stronger economy.   So far, the economy seems to be picking up and moving away from the near cataclysm of 2008-09, but there is a real danger of being too accommodative for too long, stoking the fire of out-of-control inflation and other unintended consequences.

A check on Uncle Ben's more profligate tendencies have been the voices of the few remaining inflation hawks on the Fed's Open Market Committee and in the regional Federal Reserve banks. Some of these "hawks" have turned from predator to prey as normally reliable sources of fiscal rectitude have been remarkably squishy on the necessary end of the current uber-easy policy stance. It is our belief that the market has sniffed out this tendency toward easier conditions and has bid the price of the stock market out of its February/March slump. We celebrate a rising stock market but believe our emphasis on higher quality (less debt, steadier earnings) stocks will serve as a buffer against the inevitable normalization of monetary policy.

In the meantime, we are cheered by good corporate earnings and positive dividend changes within portfolios under our charge. The U.S manufacturing sector has been experiencing robust growth that we believe will continue. We think that spending by business on technology upgrades will continue to drive earnings growth in our tech holdings.

On the fixed income front, we believe rates are set to rise across all maturities. We do not believe the rise in rates will be enough to cause a problem for stocks, but at the margin, it will be more attractive to deploy money into the bond market after the next 9 to 12 months.

Commodities have been on a tear, with oil, gold and silver reaching multi-year highs over the last few weeks. We expect this to subside over the next few months as speculative froth generated from events in Japan and the Middle East subside. However, continued global growth will keep oil above its long term trend price for some months to come. Similarly, concerns about America's fiscal and monetary stance will keep gold at an elevated price for the foreseeable future.

 The Altavista Investment Team - Spring 2011