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.