Fishing with Uncle Sam.

January 8, 2013

Happy New Years, friends.
New Year? New plans. And with the recent (semi) conclusion of the Fiscal Cliff issue, we look ahead at prospective opportunities this year.
In a recent interview for The Wall Street Journal, I provided some thoughts on investor motivations and initiatives for the coming year. In our estimation, those who remain recognizant of downside risks while seeking out select, strategic opportunities will be rewarded. Those who simply throw capital into the marketplace will not. Click here to read the piece.
Now, some thoughts on what lay behind and ahead.
. . .
"I will prescribe regimens for the good of my patients according to my ability and my judgment and never do harm to anyone."
-Hippocratic Oath
Upon graduating from Medical School, Doctors pledge the Hippocratic Oath. Only then are they granted the right to practice medicine.
A portion of that oath involves doctors pledging to, at the very least, do their patients no harm. In other words, while a doctor may not be able to cure a patient, nor provide the perfect course of treatment, he will still endeavor to do no harm to the patient.
While doctors endeavor to never harm a patient, our elected officials take the opposite tact. Republicans and Democrats, in fact, seem intent on bringing the patient to her knees.
On Christmas Eve, while the nation wrung its collective hands regarding the unresolved Fiscal Cliff deal, 100 Senators and 435 Congressional Representatives skipped town. Meanwhile, the president and his family vacationed in Hawaii.
Of course these people should be able to celebrate the holidays with family. Yet, on Christmas Day the nation continued to sweat out the uncertainty of a reality forged by the initiatives of this 112th Congress. Yes, the cliff was the brain child, and so the problem of, this same ineffectual group of elected officials.
So, instead of leaving for their yuletide celebrations, perhaps the purveyors of the pandemic should have remained in D.C. to work on the cure.
It is rare that a singular vantage point provides glimpses of the heights of both hubris and hypocrisy. And while the calendar's turn did bring a semblance of resolution, the damage was done.
A recent article in The Economist postulates that can-kicking is now a transatlantic sport. And much like Europe's continuing efforts to resolve its own fiscal maladies, our recent offering from a long lineage of short-term solutions does nothing to curb the unsustainable path of entitlement spending on pensions, healthcare and the like. Does nothing to solve the nation's hyper complex tax code. Nothing to trim the nation's huge budget deficit.
The article concludes by stating that Mr. Obama and his colleagues may have managed to fulfill their mandate of raising taxes on the rich (shameful 1 percenters). But, "by failing once again to clear up America's fundamental fiscal trouble, he and Republican leaders are building Brussels on the Potomac."
On balance, politicians agreed to end the payroll tax cut and raise taxes on top earners. D.C. secured another $162 billion in tax revenues for 2013, the largest tax increase in two decades.
Americans (aka the fools who voted for these cads) will immediately have less spending cash. International Strategy & Investment anticipates that real disposable income will decrease by 3.8 percent. ISI also anticipates that "real consumer spending is likely to remain sluggish at 1.5 percent."
Should be a real boon for an anemic economy. But, at least unemployment insurance benefits were extended for a year. Even though employers across the country cannot fill their available jobs.
I'd posit that the patient has been harmed. Weakened. Dulled.
Remember, the Fiscal Cliff existed because the 112th Congress created it. The ramifications will continue because the 112th Congress did little to prevent them.
Those elected by the people and for the people have managed to wipe their boots on the people. And to what consequence? An increase in tax revenue with no decrease in spending.
"Hey Bill, noticed you drove yourself and your family into bankruptcy, have no sense of fiscal discipline or economic responsibility, and still managed to purchase that new car and flat screen television - sounds like justification to provide you with a raise, you big, irresponsible lout!"
Life imitating sitcoms.
. . .
Over the holidays, I spent some time in Key West. We did some fishing with a very talented, relentlessly libertarian guide I'll call Ron.
When we weren't reeling in black fin tuna and bar jack, Ron provided lessons on how the Federal government works in the Keys.
He explained that the Feds have essentially encroached upon an increasing amount of the resources and activities plied by and relied upon by the area's fishing community. Now, just to help a few fun-seeking tourists catch fish, Ron's paying multiple Federal agencies and organizations for the right to do so. With questionably little provided in return.
At some point, it will be too cost prohibitive to take anyone fishing. "Too many Federal salaries from the pockets of local fisherman," he explained.
Now, extrapolate Ron's plight out across hundreds, if not thousands of small industries nationwide. As in Gulliver's Travels, the Lilliputians eventually find that the giant Gulliver (that is, the Federal government) simply consumes more than it can possible provide in return. Have we reached the point of diminishing returns? What do we really expect to eventually receive?
I struggle to find examples of incremental increases in public service value being provided for all of the increasing costs of operation. I do recognize a myriad of crises that were partially solved by the Federal government, but only because they were created by the Federal government.
. . .
So, with the Cliff (kind of) behind us, what opportunities have availed themselves?
Our firm has repeatedly discussed the fact that capital is flowing back into the bonds and equities of emerging markets. That trend continues. And why not? Those faster growing foreign nations have done little to debase their currencies and debt as we have.
We feel that emerging markets will play an important role in the upside opportunities sought by investors. Unlike their developed counterparts, emerging markets have already gone through the lean years of the '80s and '90s. They made the difficult, long-term decisions to bring their financial houses in order. Today, their debt-to-GDP ratios are lower and their GDP growth rates are higher than those in the developed world.
Next, investors should seek out "safety and income at a reasonable price," or SIRP, a term coined by Gluskin-Sheff's David Rosenberg.
Rosenberg feels that 2013's markets will be largely flat, and that interest rates are going nowhere. Thus, investors should seek out companies with the opportunity to increase dividends. Stocks like those on our firm's Dividend Winners List should continue to do well as investors seek out income opportunities in light of the low growth environment.
He also likes defensive stocks, gold and gold mining stocks (clients may recall that we were a little early to this party, having purchased gold miner call options - too little avail - in November and December).
Like Rosenberg, we believe that corporate bonds will continue their winning ways, gold looks attractive and defensive equities, like consumer staples, will provide consistency.
Finally, we believe that large, blue chip European equities will offer opportunity as the continent continues to sort through its issues. European equities, having been dragged into the gutters, offer great yield and promising upside, if European leaders continue to stave off catastrophe.
Yet, 2013 will not be without headwinds.
Which takes us right back to Europe. News from the continent will continue contributing to volatile market movements. We also believe that Europe offers the biggest opportunity to serve as the catalyst for a larger, more systemic market meltdown.
Europe offers evidence to the maxim that there are two sides to every story. A Yin and Yang.
As always, geopolitics will continue to roil markets. These events will include the normal suspects like Iran, North Korea, Syria and other saber rattling regimes.
While the continuing easing efforts by the Fed and other central banks will provide a safety net under equities, markets will - like last year - continue to be volatile as they move sideways. Pull backs will offer an opportunity to take longer-term positions in targeted opportunities. Be patient.
As always, set your trailing stops and have a game plan to prevent precipitous downside. Remember: we can't control the markets, but we can control our exposure to them.
. . .
For all of 2012's lessons gleaned from our failing political class, we can look to the anecdotal wisdom of men like Key West's Ron the Fisherman, who provides this final bit of inspiration.
"The government will always have its finger in the soup. Even down here in the Keys, Washington insists on extracting its pound of flesh.
I'm fine with a little bit of interference, taxation and frustration. But, after they've taken their toll, can't they leave me alone? Let me leave the harbor and go fish? My dad did. And his dad, as well. Not me.
Everyone time I leave the dock I feel like I've got Uncle Sam sitting behind me. Making one demand after the next. Telling me how to do my job. And then puking all over my boat."

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