01 Dec Three Yards and a Cloud of Dust
Legendary football coach Woody Hayes could just as well have been talking about today’s investment climate rather than his ‘Hall of Fame’ strategy for the Ohio State Buckeyes. With deficit reduction now on the front burner, higher taxes and reduced government spending seem inevitable — neither particularly stimulative for the market in the short run. If we add to this a sluggish world economy, a Federal Reserve that’s done about all it can — they purchased over 2/3 of all the US Treasury debt issued in 2011-and a stock market that has doubled over the past three years, you get what could arguably be a pretty tough environment in which to earn above average returns. It is what it is; our goal is only to make sure we win the game. This could be the time we need to be satisfied just grinding it out, taking what we can get and moving the ball forward. Patience, a little cash for flexibility and exposure to a few outstanding businesses should be a reasonable strategy. If the market decides to roar ahead — yeah team — we’re in the game!Behind all the negative publicity in front of you, you’ve also got an improvement in housing, automobile sales, employment, manufacturing, consumer confidence, corporate profits and stock prices. Yeah, yeah, yeah, but sooner or later those ballooning deficits everyone keeps telling us about are going to come home to roost!
The following areas of focus should have some measure of wind at their backs:
Housing — After multiple years of below average new construction, record low interest rates and growth in household formations, housing is showing significant signs of improvement (Wells Fargo-generating 1/3 of all United States residential mortgages, Berkshire Hathaway-owner of numerous housing related businesses).
Natural gas — Excess capital and over-drilling resulted in a precipitous decline in price which has caused a massive shift to oil only exploration. In the long term as they say ‘the only cure for a low price is a low price’. The United States has the potential to be one of the world’s lowest cost producers of natural gas, an incredible opportunity for financially strong low-cost producers to serve the utility, transportation, manufacturing and liquid gas export industries (Devon Energy).
Emerging market consumers — The desire to improve one’s health and standard of living will continue to be an important tailwind for those consumer brand companies whose products are already entrenched in the minds of their growing emerging middle class customers (Nestle, Unilever, Johnson & Johnson).
Advertising — The explosion in social media has enabled thousands of companies an unprecedented opportunity to target specific consumers with their goods and services (Google, Facebook).
Share repurchases — Shareholder oriented managers of world class businesses who repurchase sizable amounts of shares when they believe them to be significantly undervalued (JPMorgan Chase).
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