David Fleer
Bristlecone Value Partners, LLC
12301 Wilshire Blvd., Suite 320
Los Angeles, CA 90025 USA
Work 1-877-806-4141
www.Bristlecone-VP.com


Are We Climbing the Proverbial “Wall of Worry”?

May 28th, 2013

Investing pundits are fond of saying that “bull markets climb a wall of worry.”  At the beginning of the 2013, there were several reasons to be apprehensive about the direction of the stock market. U.S. GDP growth for the fourth quarter of 2012 was a meager 0.4%, the lowest level in nearly two years.  Sequestration loomed, as did another probable standoff over the federal debt ceiling.  And to top it off, yet another banking crisis emerged in the tiny Mediterranean nation of Cyprus, threatening to further disrupt the fragile Eurozone economy.

Notwithstanding these risk factors, as we near the midway point of 2013, world stock markets are broadly higher.  In fact, U.S. equities lead virtually all developed markets with the exception of Japan, where extraordinary monetary stimulus measures from a newly-elected government have caused the Nikkei index to advance nearly 50% year-to-date (though it’s worth nothing, the Yen has also weakened 17% vs. the U.S. Dollar over the same period).

Why have stock markets done so well?  There is no single answer, but many factors likely contribute.  Central banks’ policy of “financial repression” has kept global interest rates low and forced many investors into riskier assets in search of return.  As we’ve noted previously, yields on so-called “junk bonds” hover near all-time lows.  Recently, Apple Computer completed a record $17 billion bond offering that was thrice over-subscribed despite offering a yield of only 2.45% on 10 year notes (slightly less than the dividend yield on the company’s stock).

Ironically, much of the proceeds from this offering will be used to repurchase AAPL shares (which have bucked the trend of the overall market, remaining about 36% below their September 2012 peak).  Apple had previously announced a $60 billion stock repurchase plan in April, responding to pressure from activist investors to distribute some of the company’s nearly $150 billion in cash.  Looking more broadly, large U.S. firms have increased stock repurchase authorizations 88% year-to-date versus the same period last year.

Meanwhile, the anticipated standoff over U.S. fiscal policy has been forestalled by a budget deficit which is shrinking more quickly than most expected.  Measures of economic activity continue to increase, leading some economists to increase their estimates for near-term U.S. GDP growth, an upward revision reflected in common stock prices.  Finally, reported margin debt (money borrowed to purchase stocks) is nearly back to the levels of the last cyclical peak in 2007, adding further fuel to the equity fire.

In other news, the annual “Woodstock of Capitalism” known as the Berkshire Hathaway shareholder’s meeting was held in Omaha on the first weekend in May.  The Motley Fool has compiled a helpful recap of the Q&A session with Berkshire CEO Warren Buffett and his Vice Chairman, Charlie Munger.

One final story which caught our attention last month was an investigative report from NPR’s “Planet Money” news desk, exploring the reasons behind a stealthy long-term rise in federal disability benefits over the past three decades.  Titled “Unfit For Work”, the piece is a lengthy but fascinating case study on the impact of financial incentives, and reaches some troubling conclusions about the state of the American workforce.

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