I am writing today to update you on our thoughts and recent actions. When I wrote last, we expressed our concerns about fiscal policy and the risks it presents to the US and Global economy. We are happy to report that, since then, two major policy hurdles have been navigated with outcomes way more constructive than meets the eye.
First, as the clock struck midnight, a deal was negotiated to tax the rich but it included virtually no spending concessions. Despite groans from the fiscal conservatives, the deal wasn’t capitulation – it was a coup! The Bush tax cuts were made permanent for everyone who’s joint adjusted growth income is under $450K and for single tax payers under 400K. In addition the current, more generous, estate tax laws are here to stay as well. This deal amounts to a more than 3.6 trillion dollar reduction in taxes over the next 10 years. And even though the temporary payroll tax holiday expired, that’s also a positive. Don’t they pay for the real budget problems – Social Security and Medicare? And no spending cuts? Now that we’ve taxed the rich and increased Social Security taxes, I guess the conversation has to focus on spending. Right?
The second policy hurdle negotiated was the “sequester.” On March 1st, across the board spending cuts were triggered. Now I’ll agree that across the board cuts are unnecessary and don’t address the real spending problems, but they equal 1.2 trillion dollars in reduced spending and probably kept the US from another cut to its credit rating. More importantly, however, these cuts will affect a lot of people that have no idea what “sequester” means. The majority of people have been insulated from feeling any of the pain and sacrifice we often hear we should anticipate. How is that good? When Meals on Wheels and Head Start programs get cut, when security lines get long at the airport, when people realize we can’t train our troops or protect our interests and citizens around the World, they will scream bloody murder. Hopefully that will light the fire that spurs our politicians to address the real, structural deficit.
A grand deal still needs to be realized, but it really is attainable. Most agree that broadening the tax code and raising more revenue is inevitable. Debt and demographics require it. Many states are already taking the lead. Tax reform proposals abound. Most also agree that entitlement programs must be reformed now, before it’s too late, to care for our aging, sick, and poor. When the noise level from the majority gets loud enough, I think a reelection focused Washington will have no choice but to act.
So what have we been doing? Immediately after the massive tax cut deal, we added to a variety of equity positions. We’ve focused on areas that have been hurt the most in the great recession and that probably will continue to rebound like real estate, global and developing markets, and technology. We’ve even added exposure to small/mid-cap equities while reducing bonds and cash.
Despite all the pessimism and worry, the recent more constructive negotiations have allowed the economy to continue to grow. Consumer confidence was much better than expected in February. New home sales jumped 15.6%, much higher than consensus estimates. 4th Quarter GDP was revised to a positive rather than a negative number. Chicago PMI rose in February pointing to continued manufacturing expansion in the region. ISM manufacturing index was stronger than expected in February. And while the economy certainly hasn’t reached “escape velocity” yet, the evidence would suggest it’s continuing to move in the right direction.
In closing, thank you for your trust and confidence. 2012 was a very profitable year. We believe 2013 can also be rewarding. We’ll keep a close eye on things so you can focus on useful distractions, like watching your favorite investigative crime show. We will continue to “follow the evidence”.
Sincerely,
Donald Miller
CEO / Principal
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Stock investing involves risk including loss of principal. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
