Let's Get Real!

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America's economy is doing pretty damn good. Right now it is the engine of the world. It is time to stop the trash talk and emphasize the positives as well as discuss the negatives that exist and come to solutions to make things better for all.

Don't you hate waking up every day hearing how bad things are: we are entering a bear market, gold is the only place to invest, our national defense is weak and our government should be voted out as they are unwilling/unable to act for the common good? It makes me want to hide my money under the mattress…EXCEPT for one thing.

The pundits/experts/politicians all have it wrong. We are the greatest nation in the world. And yes, we have problems that need to be addressed and overcome to make us better. Ask yourself where you'd rather live; where you'd rather have a business; and where you'd rather raise your family. It's far from perfect anywhere, but I can assure you on a scale of 1 to 10 that we are on the highest end of the scale.

Where is Ronald Reagan when you need him? He was always an optimist, capitalist, the realist and great communicator. He knew how to uplift people and bring opposing sides together somewhere right of center.

I am anything but a Pollyanna. In fact, I have been trained to be a skeptic, to question everything and to look at what is wrong first. I began my career as a research analyst in the trust division of Chemical Bank. If you can minimize risk, things can get better. Then, you move on to strengthen positives making the overall equation even stronger. This is a surefire strategy that will end you up in a far better place. And naturally, always maintaining an open mind as we live in a period of rapid change. Globalization has and will continue to impact all of us. The status quo no longer exists.

Stop looking in the rear view mirror!

Did you happen to hear Bill Gross' comment that if not for the consumer, we'd be in a recession? Well, the consumer is 70% of our economy, his spending is up more than 4% over last year, his real income is rising and his balance sheet keeps improving.

Maybe Bill Gross did not notice that our "recession-like economy" created 255,000 jobs in July, over 2.2 million jobs over the last year and average hourly wages are up 2.6% from a year ago, the best in 8 months. In fact, things are so bad out there that over 400,000 people returned to the labor force last month, which kept the unemployment rate steady at 4.9%. By the way, the average workweek increased 0.1 hours to 34.5 hours. Not too shabby!

The bottom line is that the U.S. economy enters the second half of the year in fine shape with growth expected to exceed 2.5% over the next two quarters led by continued strength in consumer spending. In addition, we expect a reversal from inventory liquidation to accumulation, which will add over 1% to second half growth offset to a small degree by an increase in the trade deficit.

Corporate profit growth, x-energy and metals, will accelerate boosted by rising volume, positive operating leverage, controlled S, G and A, reduced interest costs, buybacks and a smaller translation penalty than in prior quarters. We expect energy and metal earnings comparisons to improve beginning in the first half of 2017 at which point they will no longer penalize overall S & P earnings.

This really has been a two-tier market and a market of stocks. It's a wonder that the stock market has just reached an all time high despite the drag from the energy and materials sectors, which are over 15% of the total market weight.

There were two notable positive developments overseas last week. First, Prime Minister Abe's $276 billion stimulus plan was passed, of which $74 billion represents new government spending. Second, India passed a landmark tax bill to simplify and transform its economy into a single market for the first time in the country's history. While it's difficult to quantify the benefits to each economy, it moves the needle towards supporting growth.

So where does all of this leave us?

Interestingly, most economies and markets are facing the same issues, which are a lack of confidence in their systems and the need for fiscal, tax and regulatory changes to boost demand and capital spending. G-20 and the IMF say the right things; recognize all of the issues; and have a laundry list of solutions that would stimulate the global economies. However, these bodies are powerless to implement any of the needed changes.

It's time for each government to implement change with one eye on what is happening in other parts of the world too. No one can afford a trade war or competitive currency devaluation. OPEC, too, must work with other nations to balance supply/demand and limit these wide swings in pricing that are destabilizing rather than trying to put their competitors out of business.

Globalization is a fact of life. Each country has a duty to its own and also to its neighbors. The haves better stop trying to take advantage of the have nots or we will continue to have more Brexits. Living in peace and harmony is far better than the alternative.

The United States is sitting pretty amongst other economies of the world. The interest rate differential is sucking in capital from abroad keeping our mid and long term rates lower than they otherwise would be at this stage in the economy. Recent moves by the Bank of England, BOJ and ECB make it very difficult for the Federal Reserve to act until global growth is on sounder footing.

Having said all of this, I believe that global growth will accelerate at the margin in the second half of the year; inflation will pick up slightly; the yield curves will steepen a bit; and corporate profits will surprise on the upside for reasons mentioned earlier.

Looking out over the next few years, it is clear that governments will increase infrastructure spending and make tax changes to stimulate capital investment to boost over all economic activity. We have added to a number of stocks that will benefit from these trends. We also believe that oil and industrial metals supply/demand will move into balance in 2017 which will lead to sustained price moves higher over the next few years as demand increases and excess inventory levels are reduced.

The wind remains to our back as the market remains statistically undervalued. Higher earnings plus low interest rates along with reduced financial risk are a hard combination to dispute.

We outperform the averages by a wide margin from shifts in our portfolios that we made a while ago to benefit from these projected trends. At the same time, we reduced our exposure to consumer nondurables, drugs and interest sensitive stocks. Having said that, our portfolio continues to yield over 2.5%, which is down from a prior level of 3.0% due to appreciation of our portfolio. We continue to own only the best in class.

So remember to review all of the facts; pause and reflect; consider mindset changes; control risk and maintain excess liquidity at all times; do independent research on each investment idea…and

Invest Accordingly!