True Grit – Investing With A Vengeance

 This year Hollywood is ending the year with a vengeance amidst the remake of the 1969 classic, TRUE GRIT, which starred the original Hollywood bad ass, John Wayne. This exceptional remake is quite a divergence from the standard no plot, special effect extravaganzas, starring former Disney Channel celebrities we’ve grown accustomed to at this time of the year. The movie centers on 14 year old Matte Ross, (played by Hailee Steinfeld), who hires U.S. Marshal “Rooster” Cogburn, (played by Jeff Bridges), to find her father’s murderer and have him brought to justice. It is a movie that has virtually no special effects, manicured stars, illicit humor or any of the other so called successful ingredients of a Hollywood blockbuster — yet it had a very good opening weekend. This early success defies the logic of many movie critics who claim that revenge-themed westerns can no longer succeed in Hollywood as they once did. This may be proof that movie goers are getting a little tired of the same old “tricks” and want to be “entertained” and not just  “distracted”.

This year in the equity markets investors experienced what many would characterize as a “blockbuster” year with over 10% returns on the S&P 500 and upward of 17% in the NASDAQ composite. The hero, although not a former Disney Channel star, was Ben Bernanke who took center stage after being given the role of saving the world through his own special brand of “special effects” — quantitative easing. Here our headliner, Bernanke, creates “money out of nothing”, inflating everything since 2008 from stocks and bonds, to Gold up 89%, crude up 107%, copper up 230%, sugar up 154%, soybeans, wheat, corn and coffee – all up over 50%. All this in typical Hollywood fashion, trying to get us to believe that the “special effects” are in fact, reality and the economy is really improving. Also starring in this “blockbuster” market year is President Barack Obama who decided to “play the part” of supporting actor and sign an extension of the “Bush Tax Cuts”. This two year extension not to raise taxes, brought relief to those that the President referred to as “the villains” or what we prefer to refer to as the “job creators” or “investors“. This “performance” brought him concessions during the lame duck session which will increase our federal deficit by almost 1 trillion dollars, making his award winning performance “Oscar worthy”. Investors were successfully “distracted” by the special effects as they recaptured virtually “all” of their market losses since the market decline of 2008 — most unaware of what was happening “back stage” as our federal deficit grew to 14 trillion dollars.

 In the year ahead, it is highly unlikely that the same old “special effects” of 2010 will produce similar results in 2011. Ben Bernanke cannot use another round of QE without completely undermining the confidence of investors worldwide. The bond market bubble is beginning to burst and although a further round of QE could prolong that from happening, it will create a much greater bubble in the future. It is only by embracing certain facts and looking past the “distraction” to the reality, which will allow investors to achieve the “blockbuster” returns they are seeking.

1. Inflation is Here – Commodity prices especially oil will continue to surge, therefore stocks like EXXON (XOM), Schlumberger (SLB), National Oilwell (NOV) and ETFS like IEO (ishares Dow Jones Oil and Gas exp) and IEZ (ishares Dow Jones Serv) or companies like Reynolds (RAI), Dupont (DD), Archer Daniels Midland (ADM), or Powershares DB Agriculture (DBA) will benefit from higher agricultural prices.
2. Income is dead – Investing for income is a waste of time, considering bond prices will continue to decline. Stay invested in short term bonds and buy quality dividend paying stocks like Kimberly Clark (KMB), Kraft (KFT) and Duke Energy (DUK).
3. Municipal and local municipal bonds will see historic defaults due to high levels of leverage. As a result, it would be prudent to greatly reduce municipal bond holdings.
4. Precious Metals will continue to advance.
5. The direction of the market will be determined by whether or not we see an improvement in unemployment.

Mattie Ross, “True Grit’s” 14 years old main character, chose the “tough as nails” U.S. Marshal “Rooster” Cogburn, to find her father’s killer because in her words, “he was true Grit”. He wasn’t your typical hero but he knew the terrain and had no fear when it came to accomplishing what he set out to do. Mattie Ross was described as having “steel in her spine” and a face that “couldn’t hide her broken heart “. In the challenging year ahead, we too must have “true grit” in enduring the economic challenges which lie ahead of us. We too must have “steel in our spine” even when some of our investments leave us broken-hearted. This will be a volatile year and we must look past the “special effects” and “distractions” which inflated this market, to a more “true” foundation. In the end, like Mattie, we will accomplish exactly what we set out to do.

Thank You,
Jeffrey C. Sica
President
Sica Wealth Management, LLC