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Bill Robertson is the Chief Executive Officer of Big River Capital Corporation, and he is ultimately responsible for the performance of each the firm's business units. Robertson launched Big River Risk Managers Fund, LP, a fund of hedge funds on January 1, 2008; Big River Real-Estate Partners... More
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  • River View August 2013

    The August Report is now available at BigRiverReport.com.

    The portfolio produced a net return of 7% during July (as of 7/30/13) and the portfolio has returned 23.8% for year-to-date period 1/1/13-7/30/13.

    A closer look at the returns we've generated this year reveal increases in the value of the businesses that we own. However, to keep it in perspective, our results have benefitted from the rise in S&P 500 stock index, which is up over 19% year-to-date.

    Our goal is to own businesses with a competitive advantage, which are run by owner oriented people, while paying reasonable prices to acquire these investments. According to Warren Buffett, utilizing this approach makes it much more likely that the businesses we own, and therefore our investments in them, will grow and prosper over time.

    After reviewing many of the earnings reports from Q2 2013 for the S&P 500 companies, I am upbeat about business conditions generally, and I am particularly encouraged about the businesses that we own. While there are still pockets of weakness in the US and global economy, more broadly businesses are performing well and Europe has recently shown some encouraging signs such as the slight dip in Spain's unemployment rate, the uptick in Brittan's GDP and continued solid economic numbers out of Germany.

    The late spring spike in US mortgage interest rates demonstrated the vulnerability of the US housing market as we saw a pause in activity and then a return to normal activity as the rapid rate increase subsided.

    There are fundamental issues affecting China as much of the last decade's growth was fueled by cheap debt and excessive infrastructure projects. Regardless of the current data, over the long haul I believe China will continue growing as a consumer of the world's goods, services, and raw materials. Therefore, if Europe can show sustained improvement, it is likely that the global economy will continue to mend.

    US company and government reports show that costs are presently rising for US businesses and consumers at roughly 2% per year, in line with the Federal Reserve's target. Some businesses are able to pass along these costs to customers, while others are struggling, which results in weaker margins for the struggling businesses.

    I am still very concerned about all of the years of money printing from governments around the world. We could easily see the presently rising costs in the US accelerate as US employees begin to demand and receive higher wages to account for the higher costs of living.

    In Japan, the June CPI showed an increase in the inflation rate at 4 tenths of one percent, the highest rate since 2008. Yet most all of the gains can be attributed to higher energy costs. The Japanese are printing money and devaluing their currency, the yen, which is driving up the costs of imported energy. Japanese consumers and businesses are faced with a 5.8% annual increase in energy costs and so far they have seen no increases in wages (for consumers) or sales prices (for businesses) to cover the increased expenses. It remains to be seen whether or not Japan's sales prices and wages will rise as the Japanese government intends, or whether there will be unintended negative consequences yielding simultaneous pockets of inflation and pockets of deflation. This scenario bears watching because we have some of the same patterns taking shape here in the US.

    In addition, we have a transition ahead at the Federal Reserve as Chairman Ben Bernanke will relinquish his post early in 2014. Mr. Bernanke has done an excellent job leading the economy through the crisis, and I have doubts about some of the candidates in the conversation to take his place.

    If we see an acceleration in inflation, it could be much more difficult to immediately address the situation during a leadership transition.

    There is also the fear that rising rates would not necessarily stop inflation. It is possible that a rise in the Federal Funds Rate, the Discount Rate and ultimately the Prime Rate could slow growth without slowing inflation. Such a scenario would allow the current inflation lumpiness to become even more exacerbated. Our goal is to continue to own businesses which are benefiting from the present inflation trends while avoiding the struggling businesses.

    For the moment, the market is complacent and the majority of investors view US and global business conditions as improving. Historically complacency signifies high stock prices, however, complacency historically does not necessarily go hand in hand with a market top. At BigRiverReport.com, we are on watch for any changes to conditions at our companies and/or the broader economy in general.

    Aug 08 8:27 AM | Link | Comment!
  • July River View

    June performance through 6/27/13 is estimated at (1.8%). Year-to-date performance is estimated at 15.7%.

    On Wednesday, June 19 2013 Federal Reserve Chairman Ben Bernanke clarified his vision for the stimulus unwind. The asset purchase unwind could start in the Fall of 2013 and complete during the middle of 2014, IF all goes according to the Fed's economic growth projections. The asset purchase unwind would correlate with a 7% unemployment rate and 2% forward annual inflation expectations. The Fed funds rate is not expected to rise until 2015, correlating with a projected 6.5% unemployment rate or better and 2% forward inflation expectations.

    The US stock markets began to discount the effects higher interest rates will have on corporate profits. In addition, the US stock markets are grappling with the affects higher interest rates will have on US consumers; state, local and Federal borrowing and the US economy in general.

    We've experienced a sharp spike in US Treasury interest rates. Theses higher interest rates have created a sense of urgency for borrowers, and there is concern that the supply from companies and governments trying to refinance could overwhelm demand. There is also concern that the Fed could become overwhelmed by bond market selling.

    However, unless we see an uptick in the global economy, which could be forthcoming, and a coincident uptick in inflation, I do not see an interest rate death spiral as the most likely scenario. We will be watching for signs of a paradigm shift as a result of years of money printing around the globe. The next time the world is in trouble there could be a run away from government debt.

    Our view today is that the world bond money has to go somewhere, and with all major nations around the globe showing lackluster growth at the moment, long dated US Treasuries nearing 4% could become attractive for bond investors thereby keeping interest rates in check.

    We are mindful of the US debt, the US deficit and US unfunded liabilities, but a growing US economy with moderate inflation can cure a lot of these ills. (But not all, the US still needs sound fiscal policies).

    We will be monitoring the data for a continuation of US and world GDP growth, inline inflation projections, positive global employment trends and moderately higher interest rates unfolding over the next several years. So long as this data continues to progress along with expectations, we prefer to own great US businesses.

    Thank you for your interest in BigRiverReport.com. Subscribe today to receive the regular emails with trades and commentary.

    Bill Robertson

    Disclaimer. BigRiverReport.com is a financial newsletter publication relying on Federal exemption under Section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-2(a)(11)) and individual State exemptions under Section 401(f) of the Uniform Securities Act. We do not provide any investment advice, nor do we make any investment recommendations. You are able to view the BigRiverReport.com portfolio and all of the trades made for the portfolio in order to aid your research efforts, but ultimately the decisions you make for your portfolio are your responsibility. I believe the research and work that we are doing at BigRiverReport.com will improve your investment performance, but there is no guarantee that you will be able to utilize the information for financial gain. In fact, you could incur financial losses. The BigRiverReport.com portfolio is managed in a tax deferred account. Each individuals financial situation is different. Please consult your own financial advisors and tax professionals prior to investing.

    Jul 09 12:50 PM | Link | Comment!
  • Big River Report June River View

    The May performance estimate is 3.1%, 17.4% year-to-date.

    The June Report is on the website. Log-in at BigRiverReport.com.

    We have initiated new pricing, subscribe today!

    River View

    The S&P 500 stock market index was selling for under 12 times forward operating earnings at the beginning of 2012. A very attractive PE as the average in recent history has been around 17 times. Using $110 for 2013 S&P 500 operating earnings, at 1660, the S&P 500 was trading around 15 times current operating earnings projections.

    A couple of interesting facts: one, actual diluted earnings per share over the last four quarters are estimated at $87.50. Therefore, the S&P 500 is presently trading at nearly 19 times trailing twelve months (ttm) diluted earnings per share. Two, after reviewing Q1 earnings reports for many S&P 500 companies, we saw that revenue was roughly flat and diluted EPS was roughly flat versus the prior year.

    Operating earnings are going to have to meet optimistic projections for the balance of the year in order to reach $110. If the stock markets remain robust, $110 in operating earnings for the S&P 500 during 2013 is achievable.

    If the US stock markets have a severe correction, it would tend to dampen consumer confidence and the earnings would not be as likely to materialize.

    At $110 in operating earnings and a 17 PE multiple, the S&P 500 could be at 1870, nearly 15% higher than where we are presently trading at 1630. With operating earnings projected at least $120 in 2014, that could get the S&P 500 over 2000 within the next year-and- a-half, IF these earnings materialize.

    Analyst are notorious for being overly optimistic when it comes to forward earnings projections.

    At the end of the day, the value of a business is determined by the return on capital the business earns. At various times, investors are willing to pay varying prices (PE's) for those earnings. Fluctuations in investor sentiment determines what prices investors are willing to pay for businesses. At the moment, investors are optimistic about the future, and they are willing to pay more for expected future earnings than they were a year-and-a-half ago.

    The second component is the actual earnings per share that companies earn. Earnings per share also fluctuate with the economy and the industry fundamentals for each particular business.

    At present, the market is counting on the economy to improve, and more specifically, the market is counting on business profits to improve significantly in the future. IF profits improve, the bull market can keep chugging towards S&P 500 2000.

    However, given the present level of optimism regarding expectations for future earnings, if these expected profits do not materialize or if the perception that the profits will not materialize takes hold, the market could run into significant headwinds.

    The majority of the price appreciation in the S&P 500 over the last year-and-a-half has been from PE multiple expansion (investors feeling better about the future earnings potential for companies). While we could still have modest multiple expansion ahead, most of the multiple expansion is behind us, profits will need to meet expectations for the S&P 500 to keep moving higher.

    Hopefully we are entering a healthy consolidation phase for the US stock markets. If these markets can avoid panic selling, I believe we can escape without too much damage to consumer confidence. Especially since the US stock markets have already enjoyed significant appreciation this year.

    If the outlook for 2013 and 2014 earnings growth is revised materially lower due to rising interest rates, slowing economic activity or any other unlimited number of factors, the stock market would have to re-rate based on the revised outlook. For example, if analysts revised S&P 500 operating earnings for 2013 to $100 and for 2014 to $105 (more realistic numbers based on actual Q1 results), a 15 PE takes us back down to 1500 and a 17 PE to 1700 (only 4% higher than May closing level of 1630).

    Price paid for earnings received is all that matters in the long run, but in the short run, markets move more on investor sentiment (perceptions about the future). We aim to own companies where we believe the earnings are reasonably priced and likely to be realized.

    Our goal is upside participation during rising markets and capital preservation during declining markets.

    Thank you,

    Bill Robertson

    Disclaimer. BigRiverReport.com is a financial newsletter publication relying on Federal exemption under Section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-2(a)(11)) and individual State exemptions under Section 401(f) of the Uniform Securities Act. We do not provide any investment advice, nor do we make any investment recommendations. You are able to view the BigRiverReport.com portfolio and all of the trades made for the portfolio in order to aid your research efforts, but ultimately the decisions you make for your portfolio are your responsibility. I believe the research and work that we are doing at BigRiverReport.com will improve your investment performance, but there is no guarantee that you will be able to utilize the information for financial gain. In fact, you could incur financial losses. The BigRiverReport.com portfolio is managed in a tax deferred account. Each individuals financial situation is different. Please consult your own financial advisors and tax professionals prior to investing.

    Jun 01 11:05 AM | Link | Comment!
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