2011 First Quarter
All in all we had a fine quarter to start the new year. What some of you may be asking is: How does one explain this hot bull market that does not want to quit - even when faced with a major earthquake in Japan, unrest in the Mideast and high unemployment? While reading many of our mutual fund manager reports over the past three months, I believe the answer to this question lies in the continued globalization of the U.S. economy. While costs for American firms continue to decline due to a cheaper labor force overseas and improved efficiencies, the demand for U.S. goods and services are increasing due to higher incomes in Asia. The Asian population wants to live like Americans: They want to buy blue jeans, own their own car and eat at American restaurants like McDonalds. I read the other day that the Chinese increased demand for pecans - of all things - has translated into a global $6.95 price tag on a pound of pecans from $3.35 per pound two years earlier. This increase in demand was attributed to the pecans widely reported health benefits. According to the Wall Street Journal: The Chinese have to rely on pecan growers in the United States where in 2009 they purchased one-quarter of the entire pecan crop.
Of course there are other reasons for increased stock valuations so far this year. The Primecap Odyssey fund managers state in their latest report that "the balance sheets of U.S. corporations are as strong and liquid as they have ever been." They also mention that U.S. companies in areas like health care and information technology continue to innovate and spend big dollars on research and development. Many of our mutual fund managers also have reflected on the theme that instead of investing directly in China or India where a state-owned company may not have shareholder interests at heart, they would prefer to invest in companies that have substantial sales in China and India but are based in Europe or the United States. I have read in several places that managers believe that the emerging market stocks are too expensive for their tastes. Why purchase an emerging market stock selling at a huge premium to its intrinsic value that could be taken over by an unfriendly government when you can receive exposure to these same emerging countries by purchasing an American conglomerate with 40-50% of their revenue coming from China or India (think Coca Cola)?
What we have witnessed since the fall of 2008 is a corporate climate that has improved their technology to become more efficient in an increasingly volatile world. It is true - we do not know what major catastrophe is going to hit us next. However, after witnessing 09/11, the Great Recession as well as the Japanese earthquake and the accompanying radioactive fallout, I believe today's economic climate demands that companies become more flexible; these companies must adapt and adapt quickly. If they do not, they will be left behind. Hopefully the mutual funds I have selected have found these nimble corporations and have purchased them at a substantial discount.