Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors. River View May 2013

The portfolio was up an estimated 3.1% during April bringing year to date net performance to approximately +14.3%.

Anticipating a sell-off in US equities that did not materialize, we actively traded the portfolio during April. We evaluated earnings from over 100 businesses, and the following theme emerged: decent profit growth / poor revenue growth.

Given all of the global stimulus, the fact that US companies are having such a tough time growing revenues is concerning. Clearly, the global economy continues to struggle.

Time usually brings change, since nobody can predict what type of change will occur, we use history as our guide. With all of the coordinated global government stimulus positively affecting stock markets, it doesn't seem likely that the current trends can continue indefinitely.

Most likely, either global stock markets will reverse or growth will pick-up. Although, it is possible that given the Debt: GDP ratios for the developed nations, the status quo could continue longer than expected. However, if debts continue to be repaid alongside moderate growth, eventually Debt: GDP ratios will come down allowing for a return to healthy growth.

As you may be aware, I believe the Federal Reserve is signaling an end to QE in the US with plans to begin a higher interest rate cycle within the next two years.

I heard an interesting counter argument though, which states that the US can't afford to raise rates because at higher interest rates the interest payments on US debt would become unmanageable. According to this argument, the bond market is discounting more than a decade of low interest rates and sluggish growth.

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Perhaps, this is why we are seeing the increase in demand for dividend paying stocks. If bond yield are going to be low for another decade, why not own dividend paying stocks that can continue to meet and increase payouts throughout a sustained period of sluggish growth?

To some degree, this is happening. Investors are substituting stock dividends for bond interest payments. However, stocks and bonds are not equal substitutes. A bond is essentially a loan to a company where a stock is an ownership interest in a company. A bond holder has a legal right to receive a payment regardless of how well the company is doing (unless to company files for bankruptcy, in which case the bond holder typically holds a lien against the company's assets in liquidation). Stock holders receive dividends when the company is doing well and these payments have unlimited upside, but the company has no obligation to pay dividends and dividend payments are frequently cut or eliminated when a company meets financial difficulty.

As it relates to US equities, how is the bond substitute trade going to play out? If I understand the Federal Reserve's intentions correctly, we will be entering a cycle of higher interest rates within the next two years. As interest rates rise, investors will have the option of investing in higher yielding bonds which could decrease the demand for dividend paying stocks. Depending on the earnings prospects for these dividend paying stocks, the stock prices could go down causing dividend yields to rise. Companies will also have higher interest payments on their debt which could negatively impact earnings for some companies.

Companies that locked-in low rates for the long term during the low interest rate years and can also continue to grow earnings and boost dividends, will likely do relatively well.

Speaking to the US governments ability to meet our interest payments, if the US economy is strong, GDP will grow and the Federal government will have more tax revenue. Hopefully the Federal government, like the exceptional companies, is locking-in a majority of our debt obligations at the current low rates. It would be wonderful to see the US government actually paying down our debt! (As it did during the Q1 2013)

Although, the US has a lingering problem in terms of off balance sheet "unfunded liabilities" primarily Medicare and Social Security. The US will have to grow our way out of the problem. We have to increase GDP and shrink the debt in order to meet our future obligations. I believe we will grow our way out of the problem, but it will likely come at the price of inflation.

I have been worried about inflation for a while and while prices for many goods and services continue higher, we have so far been spared rampant, across the board inflation. Nonetheless, we do have pockets of inflation in the US.

The portfolio owns businesses with pricing power in the current economy, and we believe these businesses will continue to be a good place to be invested.

If the interest rate counter argument is correct, and the US government winds up keeping interest rates extraordinarily low for longer than I expect in order to fight global economic weakness and deflation or to get a ahead on the Federal debt, then the dividend trade could still have room to run.

I've been bearish on bonds and wrong for years and it may be that the bond bull market continues for another decade. However, based on US interest rate history, I continue to believe that we are near the end of the low interest rate cycle. While we are certainly in the midst of a long term trend of protracted global economic weakness, history suggests that "this too shall pass". Sign of a top, look to Apple's recent $17 Billion bond offering.

One indicator that I am watching closely is the inflation rate in Japan. Japan has been mired in deflation since the Japanese stock market crashed in the early 1990's. Japan and the US is not an apples to apples comparison, so I will be careful not to extrapolate. However, the US stock market crash of 2008 and the following Great Recession is similar to what Japan has faced since 1990. The US Federal Reserve took much quicker stimulus action than Japan. Japan only recent began it's stimulus action. Japan's stock market has responded favorably to the stimulus, up 60% since the November 2012 Japanese elections when the market began to anticipate the present reflationary policies. Similarly, the US stock market has responded favorably to Federal stimulus. However, as of the most recent March CPI reading, Japan logged another year of deflation, (.05%) year-over-year core.

I believe the Japanese stimulus measures will eventually end Japanese deflation. History teaches us that printing money eventually leads to inflation. I believe this will ultimately hold true in Japan, the US and around the globe. I just hope that global central banks can keep inflation in check when it returns in force.

In any case, owning stocks with pricing power and earnings growth in the current economy has been a good place to be invested. We will continue to research and monitor individual companies that meet these criteria, and we will invest in these such companies who are outperforming their competitors.

Inflation and an unexpected rapid rise in interest rates are only a two of our concerns, others are another recession and a continuation of the protracted global economic weakness . And there are always the unknown risks. Since I can't predict any of these events, we will aim to mitigate risks with higher cash balances during declining markets.

The FREE TRIAL ended April 30, 2013. The Big River Report for May 2013 is online now.

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