Winter 2012

A New Year

It is our hope that 2012 represents the year when the co-mingling of politics and markets reaches its peak and begins to recede. After the election of the U.S. president in November, the demagoguing of important issues such as government deficits, appropriate tax policy and the management of global trade policy can leave the hot campaign spotlight and move to quieter halls in Congress and the Executive branch. Perhaps this will result in a process which will adopt some sane, sustainable basis of taxing the people and spending their money.

Stabilization of the uncertainty that has characterized government policy since 2008 will, in our view, provide business with the confidence to invest some of the record trillions that corporate America has on its balance sheet, perhaps improving on the sub-par growth that has characterized this recovery. But it is a long time to the election in the fall, and as someone once said “Money never sleeps.”

Early in 2012, there are some reasons to encourage your inner optimist. The U.S. economy is slowly improving, its pace retarded by the need to repay the trillions of unproductive debt built up in the boom years. The profitability of U.S. corporations has never been higher and analysts are calling for growth in profits (albeit slowing) again in 2012. Interest rates are low and will likely remain that way for the foreseeable future. The stock market is reasonably priced.

In our view, the major risks to markets stem from abroad. The European debt crisis continues to roil markets and there is no “magic bullet” which will slay the threat. The second major risk is the transition which is taking place in the developing markets as places like China turn from an export driven model toward a more domestically focused policy. It would be naïve to plan for these international risks to resolve themselves without some surprises in the months and years ahead.

An emphasis in high quality large cap U.S. equities (a position we have flogged for years) was beneficial in 2011 and, in our view, will be even more beneficial in 2012 than in 2011. The U.S. as a safe haven for foreign capital flows should continue to be a factor early in the year. We acknowledge that values are compelling in Europe and in the emerging world and we expect to upgrade these markets in client portfolios if a benign outcome to current economic issues plays out.

On the fixed income front, treasury bonds are wildly overvalued and the puny yields offered by government securities will necessarily climb. However, the “safe-haven” offered by U.S. bonds will support the maintenance of these low yields until some resolution of global markets appears on the horizon. Some investment grade corporate bonds, municipals and even selected “junk” bonds look attractive relative to Treasuries.

While we remain cautious, we believe a more growth-focused investment policy may be in the cards as 2012 progresses.

The Altavista Investment Team – Winter 2012