The Word of the Day

Every other day or so, I print out the word selected by Dictionary.com and post it somewhere in the kitchen where it may best be espied by my teenaged daughters, and in the process miraculously improve their vocabularies and, subsequently, their college test scores. But the real truth is that I enjoy these words more, these old/new friends with their meanings refreshed and with their relevance to our daily life. Take the original meaning of May 25th’s offering—artifice: “cleverness or skill; ingenuity; inventiveness”, from the Latin ars, art -,”art” +facere “to make”. From that noble, craft-like beginning, artifice has also become something else by the fourth suggested usage: “Trickery; insincere or deceptive behavior”. Isn’t that a sad commentary on the advancement of English-speaking people where we transform the spirit of art and hard work into trickery and dishonesty? It’s just a word, but it got me thinking as I sat down to write this over the 4th of July, that it is that fourth meaning that accurately describes U.S economic policy as we head to yet another bubble-piercing slowdown in the world economy. Surely some of you remember the last time this happened in 2000-2003, when the S&P 500 declined over 40%. This one will hurt more, because the asset prices likely going down in addition to stocks will be home prices. Why does that matter? Well, it is pretty evident in this low wage recovery since 2003 that most folks have been leveraging up their homes to buy things.

That’s right, investors aren’t wealthier because of productivity gains or advances in technology, they are wealthier because Allen Greenspan has pumped up the value of risky assets (defined in our universe as one that is either illiquid – like real estate- or doesn’t pay us a required interest payment, say common stocks). But how much higher can home and stock prices go? Let’s do the math: all that pumping has resulted in about 3% inflation and has dropped 5 year TIPS (Treasury Inflation Protected Securities) yields from 4% to 1%. That means we are at a 1% REAL yield (interest rate minus inflation) right now, with zero as the dead end limit. We’ve been there before, in the dark days of 2002, and the Japanese were there and below, for years. And most of the so-called experts think we will stay in a low interest rate environment for years, as long as the Chinese (and other emerging economies) keep buying our debt and financing our deficits. Why are the Chinese so “biddable” (April 2-“easily led or commanded; obedient”)? Well, it’s because they want to keep their masses of cheap labor working and thus will sell us things on the cheap.

For the quarter, the S&P was up 0.26% and is down for the year at -1.44%. Most of our accounts recorded gains in this quarter averaging .80% and are up 1.60% for the year. Dividends and interest coupons will improve that number, and by the fall I will have an insert for your statements with more detail (software productivity!!). We continue to be very defensive, and feel that good quality bonds, large global stocks, energy related investments and cash will perform well.(Don’t laugh at the latter—short rates for this nearly risk less asset class are up in the 3% zone). Many of you also see commodity related investments in your holdings. Remember, our long term secular view again—2000-2015, Stuff beats Paper. Simply put, commodity assets don’t need declining interest rate environments to do well; their appreciation is tied up in the context of supply problems (think oil) and continued strong global demand (think soybeans and lumber and all those workers in China). We also continue to err on the side of cheap European global companies; often they are better positioned “politically” to reap global benefits and they are much cheaper than their U.S counterparts: why buy Hershey at 21x cash flow and a 1.45% yield when you can get Nestle for 13x cash flow and a 2.64% yield? The chocolate is better, too.

But don’t think I’m not scouring the U.S. for investment ideas, too. As most of you know, I try to get us in early on small cap ideas like XM radio and groundbreaking drug development companies. The pipeline for drugs in trial for cancer and viral therapies is remarkably strong and should be quite a fertile place to invest over the next few years. This also bodes well for our overweight on the global pharmaceuticals who are transforming from their dependence on “blockbuster drugs” to a more numerous and diverse roster of therapies that can supply more earnings stability over time. Small capitalization investing may seem heretical with my penchant for quality global companies and bonds, yet my years in the business have taught me that small companies in America are perhaps better suited to providing capital appreciation than their large counterparts. A little goes a long way, though; no conservative portfolio should ever have more than 5% weighting in this, the riskiest publicly traded asset class.

So feeling patriotic, and fresh off a marvelous fire work display at Piping Rock, here’s my grand finale: We should never be “indolent” (May 14-“Avoiding labor and exertion; habitually idle; lazy”); in our pursuit of knowledge and understanding; our “acumen” (July 2-“Quickness of perception or discernment; shrewdness shown by keen insight) in investing money should be related to the “frisson” (May 6,-“A moment of intense excitement; a shudder; an emotional thrill”) that we experience when we obtain insights and knowledge. We know that there is no “nostrum” (July 5-“A medicine of secret composition and unproven or dubious effectiveness; a quack remedy”) for success, only that as “sentient” (July 3-“Capable of perceiving by the senses; conscious”) beings we must try to “presage” (May 20-“To indicate or warn of beforehand”) market trends that would cause us to lose money. We will not be afraid to find a “redoubt” (April 12-“A defended position or protective barrier”) in this time of economic uncertainty and will try to “suffuse” (May 24-“To spread through or over in the manner of fluid and light”) our family and friends with the love and kindness that will surely be reciprocated.

Now that’s artifice.