Major market indices were higher last week. The DJIA gained 0.84%, the S&P 500 increased 1.10%, and the Nasdaq rose by 1.90%. Value stocks outperformed growth stocks. And the small cap index lost 0.53%. The 10-Treasury yield remained added 3 basis points, closing at 3.32%.
While the leading indicators show that the economy continues to improve, the rubber meets the road in sleepy Omaha, Nebraska. Warren Buffett's Berkshire Hathaway sold $1.5 billion of fixed-rate debt to retire floating rate notes and lock in interest payments at a time when Mr. Buffett clearly feels that the economy, and so at some point interest rates, are on the rise.
When forward-thinkers like Buffett, whose company relies on debt to bolster operations, flee floating-rate for fixed rate bonds, it is an omen that the Oracle of Omaha sees a rising tide lifting all boats.
Further, the continuing outperformance of small-cap equities represents another positive omen. Small caps are more dependent on U.S. demand. Their outperformance has preceded faster economic growth and the biggest equity rallies of the last two decades, according to Bloomberg data.
And with large companies, on the basis of profit, trading half as expensively as smaller stocks according to the traditional multiples of the S&P 500 and Russell 2000 indices, the rotation into large stocks could be around the next corner.
Still, that corner could be a ways up the road. Most analysts forecast that small-cap earnings will rise 80% in 2011, compared to forecasts of 22% for large-cap stocks. Large caps have been dormant for so long that the contrarians within us know that they must roar as some point. But, we must never rush to judgment. A trend becomes such only after it has begun.
We are in the business of gauging the fundamentals in order to more effectively spot patterns as they begin. If one expects something to happen, then one sees it earlier than those who aren't looking. That largely explains why the average investor is the antitheses of Nostradamus.
A good investor bares more resemblance to the patient hunter than the riverboat gambler. He analyzes the data. Forecasts the possibilities. And then sets his traps for each outcome. As the prey begins to show itself, he has already laid his plans and is prepared to embrace opportunity.
On the other hand, the average investor/hunter learns of something that has already transpired, gets excited, grabs his tools, and dashes into the woods to chase every visible footprint, regardless of how old they might be. Before long, the average investor/hunter finds himself far from home with little prospects of catching anything but a cold.
On to politics.
Repubs took control of the House last work for the first time in four years. Their agenda is aggressive. Repeal the healthcare overhaul. Approve $100 billion in spending cuts. But these moves will likely be blocked by the Dem-controlled Senate. And while Repubs have thus far maintained a restrained tone, that won't last.
No less than Bill Gross of PIMCO, more financially astute than most anyone in D.C., recently warned that "Stimulus measures that have been designed to maintain current consumption instead of working to make America a more competitive nation in the long run... Politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well... Not likely. There will be pain aplenty."
Translation? Stop worrying about the next election cycle and start focusing on the big picture. If our political duopolists can't put their sophomoric squabbles behind them and lead, then 2008 is going to feel like the tremor before the quake.
One realizes that D.C. is no different than seventh-grade home room. Kids jockeying for position. Mocking rivals. Unconditionally supporting their cliques.
Back then, we eventually went to high school. College. We matured.
The D.C. duopolists spend every waking moment trying to maintain the status quo. Protect their fiefdoms. Politics is one of the few areas where one can be rewarded for standing still.
This market may be headed higher, but we have got to get the big picture under control. Or all of the stock market wealth in the world is not going to mean a thing. Shrink the budget deficit. Decrease entitlements. Term limit those in power. The founders did not intend these positions to be family businesses.
But, it is not simple. The covetous nature of power politics, like bedbugs, is difficult to purge. And the two major parties have become symbiotic.
D.C.'s American University now offers Political Campaign Training Classes. Course topics include the Lobbying and Regulatory Process-which includes a segment on "how rule making in Congress provides opportunities to affect legislation."
Training for lobbyists? Thousands of birds mysteriously dying? Ohio State beats an SEC team?
Could be End of Days.
Some of you will recall the famous scene from the movie Network, when Peter Finch's character rants, "I'm as mad as hell, and I'm not going to take this anymore!" His impassioned plea galvanizes the nation.
Well, it's time to get mad as hell. We shouldn't have to take this anymore. Time for leaders to lead. And then leave. Stay tuned.