By my friend David Kotok
April 15, 2013
Happy US Income Tax day.
We still hold some cash reserve in our US ETF accounts. Of course, that could change at any time. There are a number of world events that concern us. Markets seem complacent about them.
BIRD FLU. Note that the latest case is in a four year old and experts do not know how it got there. “If the H7N9 virus – as it is – were readily sneeze-transmissible, there would tens of thousands of cases. Even China could not conceal such an explosive spread. The gauge is the H1N1 strain, which spread explosively in 1918-19. That no explosive spread has occurred does not mean we’re out of the woods. Flu viruses mutate constantly. The good news: a Chinese lab reports finding nothing in H7N9 DNA, that suggests the virus spent time in pigs. That matters. Pigs can host both avian and human flu viruses, and so serve as a “mixing bowl”, in which a bird flu virus could acquire DNA from a human flu virus. Such a DNA pool promotes a mutation that allows for sneeze-transmissibility. China is the usual source of new flu strains, as it has in close proximity, hundreds of millions of pigs, poultry and persons. Ducks, wild and domesticated, may harbor bird flu without necessarily being made ill. This H7N9 does not appear to make birds sick. The CDC’s raising the alert level is driven by the agency chief’s recognition that if the alert is not raised, and the virus spreads explosively, it will be condemned. By contrast, if the alert is raised, and the H7N9 fades, the agency will be seen to have done its duty. The N-95 mask is better than nothing. However, it cannot exclude viruses, only viruses that may be on a droplet of liquid. The only sure protection against viruses is a hazmat suit and a sealed-system respirator.” (Research summary by Jay Simkin, International Representative, The Stratecon Group LLC)
ECONOMIC PICTURE. This is clearly mixed. Housing and industrial production are the big items this week. We expect housing to continue improving. The bond market indicates that economic weakness is continuing. The stock market is pricing in positive earnings news. This remains a tale of two cities: New York sources the stock market outlook; Washington is the home of the Federal Reserve, which dominates the levels of interest rates with its ongoing QE policy.
CORPORATE PROFITS AND EARNINGS. “Q1 corporate profits: the earnings season heats up this week with financials, and tech are among the heavyweights reporting, along with various consumer goods firms. Citigroup paves the way Monday, along with Charles Schwab, and several other smaller financial firms. Tuesday has Yahoo!, Goldman Sachs, BlackRock, Intel, Coca-Cola, Johnson & Johnson, Comerica, and CSX Corp. Bank of America leads off Wednesday, along with American Express, eBay, AMR, Mattel, and McMoRan Exploration. Thursday could be the biggest day in terms of the number of big announcements that include Google, Microsoft, IBM, Morgan Stanley, PepsiCo, Philip Morris Industries, United Health Care, Verizon, Blackstone Group, Capital One, and E*TRADE. There is GE, Kimberly-Clark, McDonald’s, and Under Armour winding up on Friday. Q4 profits surprised on the upside, but analysts are now taking a more conservative approach for Q1, looking for earnings to be up 1.0-1.5%.” (Summary provided by Action Economics)
EUROPE. The Eurozone mess continues. Rumors of a grand plan to “fix” the Eurozone banking system circulate without any official validation. Meanwhile, Slovenia is in the spotlight now, while Cyprus demonstrates that the first estimates of the cost of trouble are usually low. Cypriot gold sales show how a news item causes front running of markets. Will the actual sales mark the bottom of the gold price? Italy, the world’s third-largest debtor nation, is approaching 130% debt/GDP. Italian politics are at the top of European news. GIC will be in Milan for a conference next month. See: www.interdependence.org. We expect to be on the program with comments about markets and the central banking situation. There is room for conferees, if any reader wants to register and enjoy Italy in mid-May.
KOREA. Markets think North Korea is just blustering. We hope so. But the risk of an accident or incident is high. Armies are on alert, poised for trouble. Communication between the adversaries has been dampened. History has not been kind in such circumstances. The behavior of young Kim is unfathomable.
TAX-FREE MUNIS. The White House proposal to cap the benefits of tax-exempt interest at 28% and to do so retroactively is the focus of much research. No one knows how this issue and many others will be resolved. State and local officials oppose the proposal because it will raise their borrowing costs to build schools, sewers, airports, etc. Democrats have trouble with this issue on their home fronts. They also do not like the President’s attack on retirement plans. Meanwhile, it was the Republicans who stopped the extension of the Build America Bond program. Specifically, Senator Kyl of Arizona blocked it even as a Republican-controlled House committee was ready to advance it. So much for how we are governed. Democrats and Republicans seem to want to bicker and finger point, not move the country forward. Oh, if there were only a way to throw them all out and start over again.
Stock prices in America are no longer cheap. Earnings levels and profits are very high. Inflation is low and interest rates are very low, because the labor share of the US economy is weak and there is a long way to go to get it healthy. We will discuss this in full detail in a presentation at the GIC-Drexel University annual Monetary and Trade Conference in Philly on Wednesday, April 17. Any last-minute signup can be done at www.interdependence.org.
David R. Kotok, Chairman and Chief Investment Officer
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