Sunday, July 1, 2012

Fishing for a Net - Or - What you should be thinking about...

Last week's summit delivered a surprise. Germany's Angela Merkel conceded (to Spain and Italy) to allowing any country that meets the EU budgetary requirements to receive aid without additional austerity measures and without the strict oversight of the troika.

They intend to establish a single banking supervisor, you could call it a centralized banking authority - although there was no mention of a deposit insurance program or plan for handling failed banks (I suspect these will be some of the details to come). They plan to end the negative feedback loop between governments and banks (Spain's banks own a ton of Spain's debt) by allowing the European Stability Mechanism (ESM) to provide aid directly to the banks. The big tough-to-swallow concern for individual countries, with regard to the central banking authority, will be the inherent loss of sovereignty.

They also approved a 120 billion euro growth pact (stimulus plan) that would increase the lending capacity of the European Investment Bank (EIB), subsidize small businesses and issue project bonds (for energy, transportation and broadband). Critics cite the plan's relative small size (amounts to 1% of Euro Zone GDP).

Their immediate aim was to inspire confidence in Spain and Italy's creditors (allay default concerns and, consequently, bring down borrowing costs) and thus calm the financial markets. And that they did, if only for a day.

Of course the questions would be;

1. Is this the plan that finally puts a floor under the Euro Zone?

Or, indeed;

2. Can there be a floor without a Euro Bond?

My guesses would be;

1. Nope. But it is a step in the direction the world, ex-Germany, would have them head (notice I didn't say 'a step in the 'right' direction'). Could be a short to medium-term can-kicker.

2. Of course. There's always a floor. And they'd find it so much faster if they'd allow failed banks, and failed nations, to, well, fail - and markets to work. But if we're talking a policy-action-induced floor, I'd call that a net, you wouldn't think so. Merkel would (she implied) sign her own epitaph before signing onto a Euro Bond. Reality: if a Euro Bond is the ultimate can-kicker and she can pull it off and somehow delay the reading of her political career's eulogy, she'll do it. But it'll come under a different label.

As for you, the investor. What should you be thinking about? My sage (28 years as an advisor) advice would be to think about what you're going to barbecue for the kids on 4th of July. But knowing you'll be thinking about your portfolio too, here's something to chew on:

Assuming you're our client; here are a few of the (randomly selected) holdings in the mutual funds, and exchange traded funds (ETFs), that occupy the large cap US equity portion of your portfolio.

Altria
Amazon
Apple
Bank of America
Berkshire Hathaway
Biogen Idec
Caterpillar
Chesapeake Energy
Cisco
Coca Cola
Colgate Palmolive
Costco
Disney
Exxon Mobile
Google
IBM
Intel
JP Morgan
Johnson and Johnson
Kraft
McDonalds
Merck
Microsoft
News Corp
Noble Energy
Oracle
Pepsi
Pfizer
Procter and Gamble
Starbucks
Sysco
Wells Fargo

Now ask yourself, when we're past the sure-to-be-weak Q2 economic numbers, Europe, the US election, the fiscal cliff, etc. - and on to bigger and better things - and a whole new set of worries - will these companies, with their scrubbed balance sheets and strong margins, be cranking out their products and services?

Remember, 85% of the world's people live in emerging markets. And make no mistake, that emerging 85% is thirsting for the infrastructure and lifestyles developed markets enjoy. I.e., there's a (long-term) world of opportunity for smart well-positioned companies.

In terms of your particular portfolio's allocation: If you're in or nearing retirement you'll have modest (defined by your temperament) equity exposure; with a bias toward companies like Kraft, Procter and Gamble, and Sysco. If you're further out (younger) and are more concerned with next Wednesday's tri tip than you are next Tuesday's Italian bond auction, you'll be heavily allocated to stocks; with a bias toward companies like Apple, Chesapeake Energy, and Cisco.

2 comments:

  1. Marty,
    I agree with 92.3% of what you say but there are some challenges that I think are worth discussion.

    In my opinion for widespread worldwide job improvement the emerging 85% have several obstacles to become economically productive.

    First and foremost is an emerging market country shackled to widespread political corruption. Political corruption stifles increasing earned wealth distribution.

    Second, is there opportunity for the industrious poor to migrate and take advantage of production efficiencies for their own financial gain? In other words is there technological growth or scientific improvement that allows for production efficiencies and those profit increases passed on to the emerging market labor force or are the industrial leaders to monopolized for independent business competition.

    So, while I agree with you that these major manufacturers are positioned for strong earnings and no doubt bottom line corporate improvement, there could be still a drag in worldwide economies.

    If the 85% emerging markets cannot grow up the economic ladder because the wrung from poor to middle class is missing or largely unavailable, then those laborers will be absent economic improvement and toil with stagnant wages. Likely only replaced by another in the same economic plight, when their aging skills diminish their own usefulness and productivity.

    What I'm saying is without political and economic freedom of any given emerging market country, the advancing economic countries will increase their lead over emerging markets and wage gaps will increase.

    Some thoughts,
    Bill

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  2. Martin L. MazorraJuly 2, 2012 at 11:18 AM

    Good points Bill. And yes, widespread political corruption is an understatement in many markets - particularly the "frontier" (heavily impoverished) markets. And yes, politics are what chiefly get in the way of economic growth. And yes, there indeed "could be still a drag in worldwide economies."

    With fits and starts, I do believe that we'll see emerging market citizens [continue to (country specific in terms of how long)] move up the economic ladder over time. The beauty of technology, and the way it delivers information, is that it stokes desire among even the under-developed populace (censuring notwithstanding). I believe that much of what's behind China's effort to "re-balance" its economy - by focusing inward and boosting its own private sector - has to do with events such as those that occurred last year in the middle east and north Africa (not that the resulting 1st round regime changes will make their lives any better mind you).

    Speaking of China: Last report was that Apple can't make the iPhone 4 fast enough to meet China demand. GM sells more autos in China than any other manufacturer and Caterpillar is their number one industrial company. So it's more than just cheap labor. The more those folks prosper the more US companies profit. And yes I'm very aware of China's recent declining economic numbers (definite near-term cause for concern). And by the way, I see gains over there occurring in spite of, rather than because of, their central planning...

    In terms of where profits are presently coming from: 50%+ of the earnings of the average S&P 500 company currently comes from emerging markets (for example: Intel 82%, Coca Cola 75%, Apple 60-70%, Google 50-60%). There's huge incentive to see those folks prosper... It's a must...

    As I know you agree, a little capitalism will go a long way toward promoting political and economic freedom.

    ReplyDelete