[Trend Management, Inc.] [First Quarter 2012]
The stock market just had a great quarter and we participated fully in that move. It’s always better to “Get caught with your pants up” in a market rally than to “Get caught with your pants down” in a market decline. The biggest problem we have been facing perception wise in the last two years is the fear of a total collapse of the financial system similar to 2008. As we wrote in our year end 2011 letter we thought that fear was behind us and at least for one quarter that is true. We would encourage you to reread that letter if you have it or we can mail you another one to read because we haven’t seen anything new that has changed our view on what happens next. This quarters report will be a short one which is a rarity of late.
So far this quarter 90% of the calls we get from clients go something like this “The market is up, should we sell everything and wait for the market to go back down?”. If you look at the chart below you can see that the majority of investors feel the same way. Even after a 12% rise in the market this quarter investors have been pulling money out of stock mutual funds and putting it somewhere else. Even during IRA season when money normally flows into the stock market investors have been selling. There is an old Wall Street saying which says “A bull market climbs a wall of worry”. Based on the chart below we have a wall of worry out there somewhere that is causing investors to get out. Right now the public is still “out” of the market and licking their 2008 wounds. We don’t see anything in this indicator that causes us a problem yet.
Why did the market go up 12% this quarter? Our best guess as to the reason why the market went up is the chart below. Just about every central bank in the world printed money this quarter. The world is being flooded with money and when that has happened in the past the value of everything usually goes up. Whether it be a soybean, unleaded regular gas, stocks, bonds or movie tickets the pressure is on the upside in our opinion and not the downside. There is usually a lag time of about a year from when the money is printed until you start seeing an upswing in the economy. If you use the crash of 2008 as an example the Fed started printing money in September of 2008, the stock market bottomed in March of 2009 and the economy started to rebound by July of that year. As you can see from the chart below the world’s Central Banks started printing money in July of 2011, the market bottomed in August of 2011 but really didn’t take off until December of 2011. We expect to see better world economic numbers by the end of 2012.
Real interest rates are the difference from what you get paid in interest and what the inflation rate is. Today the real interest rate on a 10 year bond is minus 1% (you get paid 2% and inflation is 3%). The historical real interest rate is about 2.5%. The first chart below shows we are in unusual times right now. We have been horribly wrong on our call that interest rates will go up on long bonds but we will keep predicting that until history doesn’t matter anymore. If you haven’t done it already, lock in your home loan with a fixed rate. For reasons that are hard to explain, the next chart (bond fund flows) shows the public throwing money at bond market mutual funds even though bonds are historically a very bad bet. Sell stocks, buy bonds is the trend right now. As you know, we think that is a bad bet.
This last paragraph is the best one of all. Somewhere between the time you get this letter and May 12th the first grandbaby for my family is going to show up. My daughter Kelly, who also is one of our trusted employees, is soon going to have the cutest baby ever. She will be off work for about two months after the baby is born and then come back on a part time basis in late July. She will return to full time status in late August. We are telling you this because she will be missed during this time frame and we want you to show patience with Brandon and I when you call in with an operational question that we are terrible at answering. I can assure you we will get you an answer to your question but it won’t be as fast as Kelly does it. We are thanking you for your patience ahead of time.
Mark Brueggemann IAR Kelly Smith IAR Brandon Robinson IAR