“Do you feel lucky, punk? Well…do you?” Dirty Harry After experiencing the worst quarter since 2008 and now a remarkable rally, Mr. Market seems to be playing the role of Dirty Harry…and we, the investors, feel like the punks who have to make prudent decisions that affect our financial future. So, do we feel lucky? Before answering let’s look at the issues-of-the-day and offer some commentary on each. The European Sovereign/Banking crisis: In our humble opinion, Greece has already defaulted, but European leaders do not want to acknowledge this reality until they have insulated themselves, and their countries, from the damage as best they can.
“Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.” Sherlock Holmes Discerning fact from fiction has never been easy for investors. Discerning relevant from irrelevant facts is even harder. If you scan the daily headlines you would likely be convinced of the following: The US consumer is tapped out. A recession is imminent---if it not already here. The financial system is irreparably broken And, while there are legitimate metrics to support the above conclusions, there is clearly something else going on that belies the headlines.
“There are known knowns…. there are known unknowns… .there are also unknown unknowns---the ones we don’t know we don’t know. “ Former Secretary of Defense, Donald Rumsfeld We are told that businesses are not investing because of uncertainty. But there is never perfect information. There is always uncertainty. Always. The reality is American businessmen and women have historically thrived on uncertainty. The easier argument to make is that businesses are not investing (or expanding) due to what is seemingly certain. High taxes, over-regulation, and divided government policy are all currently “certain.” But government policy is not the theme of this month’s missive. Certainty vs. uncertainty is.
There is a new 4 letter word in Washington, M-A-T-H… David Walker, former Comptroller of the Currency The good news, bad news stories continue to unfold in 2011…and it’s all in the math. The good news is companies like Apple, IBM, and Conagra are using math in their favor. The fact is, the world is growing; and more importantly, the world’s middle class is growing. At current growth rates, the world will have 1 billion more “middle class” people in 2020 than it has today. Think about that. One billion more people who will want refrigerators, cars, computers, and cell phones…not to mention clean water and better food.
"I expect a very orderly kind of cooling to the housing market over the next few months" … Alan Greenspan 19 May 2006 The financial world is inundated with statistics, but often it is real life stories that tell the truth better than the numbers on the page. The following two stories clearly explain why we at Talbot Financial are avoiding the financial sector….and, in particular, banking stocks. ------- Story 1. Joe is a school teacher in a tough urban neighborhood. He works hard and knows he will likely never be rich. Joe bought a modest home in 2005 for $180,000. He took out a second mortgage for $80,000 in 2007. Since then, living expenses have been rising much faster than Joe’s income.
A society grows great when old men plant trees whose shade they know they shall never sit in. Greek Proverb If you want to understand what is happening on Wall Street a good clue comes from watching ESPN and the Public Access Channel. Stay with us as we explain. It is common knowledge that management and labor are at loggerheads in the world of professional sports. NFL owners and union-represented players are battling in court. The NBA is bleeding money and small market franchises like the Sacramento Kings are in disarray. Even iconic franchises like the LA Dodgers are struggling.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” Charles Dickens, A Tale of Two Cities.
"Never make predictions, especially about the future." Casey Stengel We at Talbot Financial are aware that wealth is not usually destroyed….wealth moves. Successful investors position their capital ahead of the flow of funds. The majority of 2011 forecasts can be classified as either “2010 lite” or “2010 juiced” since it is safe to assume that past will be prologue. Our advice is to not take comfort in these majority views…the crowd is most often wrong. With that said, let’s set the stage for 2011. First, the positives…