12-21-2009

Beacon Commentary Has Made Its List and Checked It Twice

We’ve been telling you stuff all year.  Some of our observations have been right on and some have been just off.  It’s time to put together the scorecard to see whether Santa should bring us gifts or coal for our predictions. 

Naughty:

  January 9^th: “President Obama will spend $ 750 billion to a $ Trillion fixing up stuff that‘s broken in the U.S. like roads, schools, and infrastructure.  That’s nothing but good.”    

    

  Turns out this wasn’t so good; the stimulus was not that effective at building roads, but it surely built the deficit!

April 6^th: “The productivity pop expectation is realistic and can take the market higher, but it is not enough for us to expect a back-to-the-races stock market.” 

After explaining all the details of the productivity pop, we totally missed that the productivity driving the higher than expected earnings reports was exactly what would start the stock market back to the races.    

May 28^th: “Bond Vigilantes are worried about deficits, bond issuance, and inflation.  They are worried about the U.S. credit rating, property rights, contract law, and their rights as bond holders.  The Obama administration is accountable to more than a simple majority of the electorate.”

Bond rates haven’t gone up as much or as fast as we expected; the deflationary impact of the recession has pretty much held rates in check until recently.  We are still worried about much higher bond yields in 2010.

August 10^th: “Is there a chance we can have a significant correction in the stock market?  Yes!  Are there much better places for your investment dollars now?  That’s questionable.” 

We first raised the issue of a possible market correction in August, and even though we told people that they shouldn’t sell into any coming correction, we would have done better to be silent about corrections altogether.  We should have realized that we’d need at least a couple of positive jobs numbers in a row before the market starts to discount the FED taking away the punch bowl. 

November 2^nd: “If our markets today mimic the path of the mid-70’s market, we might have a correction that would take us to around 9,000 over the next few months and then back to 10,000 a few months later, and by March 2011, we could be at a Dow of 11,500.”

We told people to buy any correction, but why were we even talking about corrections then?

 

Nice:

January 9^th: “It will get a lot better than you think a lot sooner than you expect…We will move back into a bull market from a bear market the same way it has happened over my whole career: climbing the proverbial ‘wall of worry’ I mentioned, and still conceding that, indeed, this time was, and is, very different.”

It was very lonely when we said this last January, but our experience told us a stock recovery was coming. 

February 10^th: “Make no mistake about it, when the economy turns, President Obama, Senators, and Congressmen will take credit…However, in the end they will deserve little of the credit, and the Americans who work through the problems will deserve the lion’s share.”

Congress, as opposed to the FED, did very little to get this recovery started.   American businessmen who cut costs and started to again make profits are rebuilding inventory- and that’s what is pulling us out of the recession. 

February 24^th: “Don’t expect to figure out exactly when the market will bottom, or when it will rally 50% off of that bottom.  I sure didn’t at Christmas time in 1974, and I don’t expect to be able to figure it out during the spring of 2009 either.”

One of our best calls ever, nuff said!

May 4^th: “This recession is turning out to be pretty normal. Don’t get me wrong- it’s awful. Recessions usually are awful. Some are more awful than others, and this one probably is one of the worst. However, it’s pretty normal.” 

Everyone was focused on L’s, Square Roots, U’s and slow growth, but this actually turns out to be a pretty normal business cycle.  All the economists I respect are now expecting a more or less normal recovery. 

July 16^th: “China is in position to continue rapid growth for the foreseeable future. China may well emerge as a pre-eminent world power among nations over the next few decades.  The investment opportunities that stem from this will be astounding.” 

In support of our strong advice on international diversification, we laid out the case for continued strength in China.  China has been even stronger than even we expected!

July 30^th: “By far, the biggest fundamental change that has emerged this market cycle is the ability of some countries, previously regarded and labeled as emerging markets, to demonstrate leadership in this cycle’s economic recovery.” 

We claimed emerging markets as having emerged pretty early on, although others created this label at the end of May. 

September 20^th: “1.  The recession ended in the second quarter, and we will have positive GDP growth in the 3^rd quarter.  2.  Any healthcare bill coming down the pike will NOT include a public option, and in fact, the government is moving quickly toward its most positive condition: gridlock.  3.  Third quarter earnings will be better than expected, made up not only of further productivity gains, but also of top line growth.” 

Staking our ground that the recession was over we explained why the stock market was roaring ahead then and why that would continue.

October 5^th: “Out of cash, quickly into bonds.  Out of bonds, quickly into stocks.  The speed will be different, but the asset allocation changes will be the same.  Same As It Ever Was.” 

Quoting David Byrne to predict the flow of investment funds, first out of cash into bonds, and later out of bonds into stocks, has worked well to explain the first phase of this asset allocation shift.   

October 26^th: “Since we started writing Beacon AM, we’ve been screaming (perhaps in the woods) that looking offshore for investment opportunities is essential to optimizing investment returns over the next decade and century.  We still believe that buying great companies’ stocks ‘overseas’ is a good tactic, but in a world that is one, buying the stocks of companies in industries with great growth prospects is key, regardless of their particular domicile.”  

We discussed that both foreign and domestic companies which focused their business plans on high growth rates occurring in the emerged markets would benefit.  2010 will be a stock-pickers year.

December 3^rd: “The self-sustaining recovery that’s occurring worldwide being brought to us by Santa will make Christmas 2010 better than the one we have this year.”  

We explained the fundamentals of a self-sustaining recovery underway the day before the “magic jobs number” that made many pundits concede that we may be recovering for the first time.   

Hopefully we’ve told readers enough nice things and made mistakes on few enough naughty things to have added some value this year.  If so, we’ll look forward to avoiding coal in our stocking later this week.   

Fred S. Fraenkel
Vice Chairman and
Chairman of Investment Policy
Beacon Trust Company

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