The nastiness has begun. It’s a mid-term election year and everyone running for office wants to tell you how horrible his or her opponent is.
As our country waffles back and forth between our version of capitalism and our version of socialism, it appears that Republicans stand a very good chance of winning back the Senate. To do that they will need to keep the states they currently control and pick up six more senate seats, several of which are almost a done deal.
What happens after that will be underwhelming gridlock because even though Republicans will have more success passing bills that they like, they will not have enough seats to override a presidential veto. And they will almost certainly see plenty of presidential vetoes. However, with Republican control over both the House and the Senate, the possibility of presidential compromise might be enhanced. But don’t hold your breath hoping that Congress and the Administration will be very productive during Obama’s last two years in office.
We don’t see the mid-term elections having any significant impact on the economy or the stock markets. However, a Republican Congress could enhance the likelihood of some tax reform legislation next year. Specifically, corporate tax reform. The United States has one of the highest corporate tax rates in the world and this has led to some corporations executing what is known as a “corporate inversion.” A corporate inversion is defined as the relocation of a corporation’s headquarters to a lower-tax nation, or corporate haven, usually while retaining its operations in its higher-tax country of origin. Corporate inversions also occur through mergers with foreign-based companies.
Democrats who think that this kind of chicanery should not be allowed have their hackles up. They paint these companies out to be evil and greedy corporate monsters that should somehow be punished. Since corporate inversion is legal, there are not a lot of effective punishments available.
Some think we should boycott “corporate inversion” companies because they feel these companies are avoiding paying their “fair share” of corporate U.S. taxes. But the boycott suggestion just doesn’t seem to get much traction with the average American citizen. For example, last month Burger King announced a merger with Tim Hortons, a Canadian chain of restaurants and coffee houses.
Your average Burger King patron might be incensed when he thinks about the company’s shady tax avoidance scheme. However, when he is in the drive-thru lane, all he can think about is that Double Whopper® with cheese and a side order of fries. Bye bye boycott.
About this time next year, the 2016 presidential race will begin heating up with GOP primaries and debates to determine who will get to run against Hillary Clinton. Could we have another Clinton/Bush presidential race? If so, will that confuse those in other countries who thought we had already had a Bush/Clinton presidential campaign?
Currently, there is no clear candidate for the Republican nomination, and I’m confident I will be able to make that statement a year from now. Between Rubio, Paul, Christie, Bush, Ryan, Romney (yes, he might convince himself he has a chance) and a host of others, the next two years will prove to be confusing and amusing as the GOP attempts to sort out who the best candidate is… and who can run with him without screwing it up.
The European Central Bank (ECB) recently announced changes to the bank’s monetary policy. Bottom line? You can borrow money from the ECB for virtually nothing, and the ECB charges YOU interest if you deposit money with the ECB. That’s right, the ECB is now paying -.20% interest on deposits. In addition, the ECB will be purchasing Asset Backed Securities in an effort to stimulate the European economy.
Sound familiar? That’s because it is familiar. The ECB is following the footsteps of our own Federal Reserve Bank, keeping rates as low as possible in an effort to stimulate a stagnant economy. Inflation is very low in Europe, bordering on deflation.
Both the United States and Europe are continuing to recover from a recession caused by massive amounts of leverage. Traditional recessions are caused typically by normal ebbs and flows of business cycles. This recession was caused by years and years of citizens and governments living beyond their means. The “de-leveraging” period takes many years and during those years, inflation is not a concern. Growth is very slow in a de-leveraging period and DEFLATION is more of a concern than inflation.
One of the areas that we feel will benefit from this low interest rate policy is the auto industry. Pent-up consumer demand for automobiles combined with low-cost financing provides an atmosphere that should spur car sales in Europe just like it has done in the U.S. the past couple of years. Companies we own that should benefit include Lear, TRW and Volkswagen.
People in our industry are fond of saying, ”sell in May and go away.” Meaning get rid of your stocks in May because the stock market always declines in the summer. Except when it doesn’t, of course. Investors are always trying to figure out reliable market patterns that can help them navigate the stock market’s ups and downs and one of those alleged patterns assumes the stock market will sell off during the summer. Like most allegedly reliable stock market sayings, “sell in May and go away” is not reliable at all.
From the end of May through the end of August this year, U.S. stocks appreciated about 4%. Foreign stocks didn’t fare quite as well, but still eked out a slightly positive return. Moral of the story: Don’t use ridiculously stupid adages to manage your investments.
Seven years ago, Mindy Corporon, Richard Boyer and three employees established a new RIA (Registered Investment Advisor) called Boyer & Corporon Wealth Management (all the stupid, cheesy names were taken so we just used our last names). The five of us had been operating our business as employees of a broker-dealer and it became painfully clear to us that our clients would be much better served in the business model that is available to Registered Investment Advisors. We were right.
At that time, we were managing around $175 million. Today we manage over $400 million and have 10 employees. And we have never been happier. If you were one of the clients who took this journey with us, we thank you.
If you have been a regular reader, you know that for the past several years we have had a large allocation to long-term, zero coupon municipal bonds, particularly those issued by school districts in California. We started buying them when the general consensus thought that every municipality in California was going to go bankrupt.
Needless to say, municipalities did NOT go bankrupt (OK, a few did, but we didn’t own their bonds). The bonds did not default, and as sanity was gradually restored, prices have returned to more reasonable levels. We have slowly been liquidating some of our muni positions and slightly reducing our allocation. Although our allocation to zero coupon municipal bonds is still higher than it will be one year from now.
August was another good month for stocks. The S&P 500 increased 3.99%. For 2014 it is up almost 10% and over 25% since last August. At Boyer & Corporon Wealth Management, we are not making any major changes to our investment allocation, except for the previously mentioned reduction in municipal bonds with a concurrent increase in cash levels.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.