Author: CJ Brott, Capital Ideas
Covestor models: Macro Plus Income, ETF Only
2011 was a disappointing year in several ways. As we expected, on a relative basis the US markets “won,” with the S&P 500 finishing largely unchanged while many of the rest of the world’s markets crashed. (This was discussed in some detail throughout the year in our monthly client letters posted on our website.)
However, while we were lucky enough to get it partially right, we had thought Europe would make more progress on their liquidity/solvency issues. And they did not. We had hoped the U.S. leadership would come together to solve our solvency issues. They did not. In both cases, the resulting downgrades of sovereign debt ratings were, in our opinion, well deserved. Those debt issues caused extreme duress in the world’s financial and banking systems.
Adding to the world wide stress was the continued tightening of monetary policy in China, coupled with the continuing easy money policies here in the U.S. In our opinion, Chinese policies led to the slowdown in commodity demand, which moderated commodity prices, while US policy led to the exportation of inflation from here to the developing world. Thus higher inflation and higher rates in the developing world flattened their markets.
Profit margins in commodity producing countries, such as Brazil, were crushed while lending strength to margins of US based manufacturing companies. While we anticipated this outcome, we did not foresee the extent to which the China slowdown would ripple through shipping markets. Thus one of our biggest losses was in Baltic Trading Limited (BALT). This “floating REIT” not only lost income from lower BDI rates but also experienced a lack of demand severe enough to slow their overall growth in new ship acquisition. As a result, the stock plummeted from our original cost level of $9 per share, while management cut the dividend from $0.16 per quarter to a low of $0.06. Recently the dividend has been doubled to $0.12 per quarter and the stock has recovered somewhat from its lows. Looking forward, we anticipate slow improvement for the dry bulk shipper as China has begun lowering rates and demand there is improving.
In 2012, we anticipate continuing apathy towards the equity markets in the near term. The same political uncertainties which plagued the U.S. and European markets in 2011 remain in place this year. However, markets are dynamic and forward looking. So as the year progresses we believe investment confidence on the part of market participants will return, and with it higher participation rates and resulting higher prices.
We also believe that this will be the year to again deploy substantial portions of risk portfolios to developing markets. In that area we particularly like Australia, Brazil, and Indonesia. While we plan to put money to work in the developing world, we do not plan to allocate any money towards Europe until such time as they are able to resolve a greater amount of the political and financial uncertainty concerning their banking and currency system.
