Welcome to the New Growth Stock Insider

The stock market enjoyed spectacular results in 2013.  Growth stocks were especially good performers.  All sectors benefited from the Federal Reserve Board's expansionary tailwind, though.  The average stock, measured by the Value Line Geometric Index (which weights every ticker equally), advanced 33.0% during the course of the year.  Higher earnings per share contributed 8% (estimated); expanded price-to-earnings multiples accounted for the balance (25%).  That's a trend that's been going on since the market recovery began in March 2009.  Earnings have been trudging forward through economic headwinds that have made it difficult for companies to expand properly.  Rather than invest in new assets and boost hiring most earnings improvement has been the result of productivity gains (layoffs) and financial engineering (buybacks).  Stock performance has been good because of the expansion in P/E multiples, a result of easy money policies.

Growth stocks have done better because their incomes have risen faster.  The rarity of better than average income growth tended to amplify that P/E expansion, sometimes leading to eye popping results.  Acquisition activity reinforced the build-up in speculative fever.  Biotech and new age software stocks have been the leading beneficiaries.  Many companies have experienced tremendous stock price gains despite not having any earnings at all.  Both groups typically spend more on marketing and R&D than they generate in total revenue, let alone cover overhead costs.  Cheap money has made it easy for Wall Street to reward that approach, arguing it's a land grab and they can cut back on expenses later.  It's kind of the same idea the Federal Reserve has been pursuing towards the whole economy.  Lay out the money now and pull it back when everything returns to normal.

We've expanded Growth Stock Insider to include some additional investment options.  The central core of the website continues to be fast growing undiscovered growth stocks.  Those issues generally perform well in all types of economic conditions.  Scott Billeadeau, who recently joined Walrus Partners as a portfolio manager, will help us write those stories.  Scott's an industry veteran who has produced superior results in the emerging growth stock area for several decades.  Besides bringing us considerable insight and experience he has a deft touch with these stocks, which can be tricky to handle at times when trading them in the market.

We've also introduced three new sections that promise useful diversification potential.  Additional Wall Street experts with proven ability have been brought in the contribute those reports. Each of those blogs will be chock full of valuable information that will expand our investment horizons.  Overall performance could be enhanced by the wider field of view.  Risk exposure could decline, as well.

Fuel Forethought

First off, though, we're going to highlight a blog we launched in 2012 when alternative energy stocks were at their nadir.  Overcapacity swamped the solar power industry.  Margins were compressed.  Sales were barely growing.  The headlines were full of bankruptcy stories, government failure, and as much doom and gloom as you could imagine.  Along came Eric Ramsley, our web site's producer.  As far as he could see -- and we came to see, too -- solar power actually was becoming cost competitive out in the real world.  And the electric vehicle investments the Obama Administration made in 2009 looked like they might be bearing fruit, in particular at a tiny unknown California start-up known as Tesla Motors.

Eric took the bull by the horns, started working through the downtrodden green industries, and spotlighted a number of high potential candidates.  That move panned out in a big way.  And we're sticking with his basic plan.  On the macro level oil and natural gas remain the world's primary energy drivers.  And the development of horizontal shale drilling techniques probably will make the United States the world's leading energy producer again before long.  That, more than any amount of Bernanke Bucks, probably will drive the country's economy forward over the next several decades.  But in the small cap neck of woods green energy stocks offer excellent profit potential.  Keep a close eye on this blog.

Dividend Growth Strategy

Most dividend investors look for yield and the price be damned.  That works great until the interest rate curve starts climbing, causing the underlying asset values to fall.  Recent research has demonstrated that a better way to go is to buy companies with a proven track record of increasing dividend payments.  That way you get some immediate income.  There also is a much greater chance of stock price appreciation.  These companies typically are larger, more established growth companies that can afford to pay a portion of their earnings out as dividends while still investing in their operations to deliver future growth.  Most are industry leaders will proven management teams and solid finances, similar to our smaller recommendations.  They've captured a significant part of their potential markets, though, and have money to spare for shareholders.

Keith Wirtz, who's managed several dividend growth portfolios in the past and currently is forming another one at Walrus Partners, has agreed to write the blog.  The companies he focuses on are top flight operations with a clear cut record of escalating dividends.  Results have outperformed the general market on an historical basis.  Risk also has been contained, below the market's norm.

Corporate Spin-Offs

Everybody on Wall Street talks about "unlocking shareholder value."  A few companies actually do it.  Analysts love to talk about stocks being worth the sum of their parts.  Down in the trading pit, though, that's usually the last thing on people's minds.  Companies that are out of favor for one reason or another sometimes have extremely lucrative divisions or subsidiaries that are camouflaged by the holding company's better known problems.  Quite often, those nuggets don't receive any kind of credit in the market.  Even if investors are aware and nod at them in passing they won't pay up because the units are locked away.  The assets aren't worth anything to outside investors.  They can't be monetized.

Mark Billeadeau, a contributing editor, has found a way to profit from those mispriced opportunities.  Bolstered by the rising tide of liquidity that's become available, more and more companies are spinning off those divisions to shareholders, often in tax efficient distributions.  Others take them public, selling a partial interest.  The more adventuresome dream up custom tailored vehicles to get the job done.  Mark analyzes those transactions to identify spin-offs that are worth  more than what they're initially offered at.  As investors become familiar with the new spin-off the stock price often improves.  There's a gravitational pull moving the starting price up to where the fundamentals say it belongs.  Other times Mark plays those transactions in reverse.  Those deals benefit the holding company to a larger extent.

Mark manages a portfolio that's built with corporate spin-offs.  Results have outpaced the general market since inception.  It's impossible to predict when these opportunities will arise.  The number of ideas that Mark writes about here may be sporadic at times.  But he has plenty of old stories to tell, which are instructive in themselves.  And some of those are still going strong.  These reports appear in our new "Guest Columnists" section.  We will recruit additional writers with unique investment ideas, as well.

Short Cellar

We had to scramble the name a little  to prevent Google and the NSA and all the other  search engines out there from zeroing in on us.  Hopefully you get the picture.  There are hundreds of stocks in the market today that trade at fabulous valuations without the benefit of an underlying earnings base.  Others rely on accounting gimmicks, perfectly legal under modern S.E.C. regulations, yet gimmicks nonetheless.  These reports will be anonymously written, for obvious reasons.  And quite frankly, most if not all will offer  positive credit to the management teams involved.  As we indicated earlier, Wall Street drives a lot of companies to produce short term metrics that don't always prove sustainable over the long haul.  And even when a strategy makes sense, conditions can change.  The best laid plans of mice and men can come undone for reasons even the mice don't understand.

Most short cellars are grumpy souls who hurl damaging allegations that tend to have elements of truth in them, but often are hyperbolic.  Most companies really are on the level and are trying the best they can for shareholders.  Still, the stock market is the stock market.  Celling short is a good mechanism for hedging a portfolio.  And thoughtful research efforts can uncover overvalued issues even when the overall market is advancing.  We'll be interested to hear your feedback on this section.

Market Outlook for 2014

We've been researching growth stocks our entire career.  When we first began on Wall Street our supervisors taught us, "Don't worry about the market.  Find some winning stocks and stay invested in them."  That remains excellent advice.

For those of you who want to worry, start with the idea that valuations are elevated and investor confidence is at euphoric levels.  That's nearly certain to foreshadow a drop at some point.  But conditions like these lasted for years during the Vietnam War, the Reagan Era, and during the Internet Boom.  Remember how long it took before housing prices finally declined.  In every case you could say it was a fluke the sell-off happened at all.  What if Egypt hadn't attacked Israel and set off the oil embargo.  What if the banking regulators had figured out a way to transition the S&Ls into the mainstream banking industry.  What if the broadband Internet had been deployed a few years earlier.  In the 1950s nothing major went wrong and the market just rolled.

In 2014 the United States financial system is in uncharted territory, with all the Quantitative Easing that's been taking place.  The easy part of the easing process is over.  Now the economy appears to be coming to life.  The question everyone has been asking from the start may finally be answered:  "What if it works?"

When Benjamin Bernanke initiated the Quantitative Easing program in 2008 the Federal Reserve held $500 billion of securities.  The U.S. banking system had excess reserves at the Fed (deposits the banks could demand back at a moment's notice) totalling $6 billion.  Today, the Fed holds $3.8 trillion in securities.  The banks have $2.5 trillion in excess reserves at the Fed.  That money used to trade in the commercial paper market or the fed funds market, financing inventories and receivables and whatever else required short term funding.  Today it sits at the Fed earning 0.25% interest, which is higher than a bank can earn in those other markets.  The Fed is keeping that money out of circulation by outbidding the market.

During the past 12 months the Federal Reserve says it purchased $85 billion a month in securities in the open market -- $1.02 trillion in total.  Over the same time the M-2 money supply in the United States increased by $634 billion.  That's a gap right there of $386 billion.  But it's worse than that because new money entering the system usually multiplies at a 1.5x rate as banks make loans off those reserves.  Before the crash it was closer to 2.0x.  So all the talk about "printing money" is technically correct.  It's just that most of it has disappeared into the bowels of the Federal Reserve, categorized as excess reserves.  It doesn't count in the money supply because it doesn't move.

What if it starts moving?  The new Federal Reserve chief, Janet Yellen, could have a challenge on her hands if the economy genuinely accelerates and the banks withdraw the funds it has on deposit at the Fed.  It's their dough.  They're entitled to it.  But if the money comes out quickly the M-2 numbers are going to surge, threatening inflation and who knows what else.  Ms. Yellen could start selling the Fed's bond portfolio to soak up the cash.  That would address the problem.  But it might propel interest rates to unpredictable levels.  Alternatively, the Government could freeze the money, Argentina style.  That seems unlikely.  But who knows.

An interesting twist might occur if some big players in the U.S. financial system figure a way to profit from such a crisis.  George Soros brought down the Bank of England in the 1990s.  Is there anybody out there today with the gumption and the resources and the brains to create a run on the Federal Reserve Bank of the United States?  The Obama Administration has been hammering the banks and hedge funds with gigantic fines, brutal regulations, even prison sentences.  As the saying goes, "Friends come and go.  Enemies accumulate."

It's an unlikely scenario.  But if you want something to worry about, that's not a bad one.

Walter Ramsley
Executive Editor

Party Like it's 1987

The economic adjustment process we discussed in our previous report is somewhat underway.  President Obama tried to avoid it, for reasons that aren't clear.  (He didn't follow the customary path in his first term, either.)  But Congress forced through the sequester.  It also restored Social Security taxes.  While the federal deficit remains elevated, it's coming down.

The stock market rallied on the move.  But new risks have been introduced to the equation.  And several systematic threats remain.  Confidence in the future exists but it still is shaky.  Investors know stock prices are being supported artificially by the Government.  And while they would like to think the stimulus will lift the economy sufficiently to make those bets pay off, there's a nagging worry it won't.  If the support is withdrawn before the fundamentals catch up a sell-off could result.

A similar situation existed in Ronald Reagan's second term.  Speculation was rampant.  Every morning the Financial News Network (as CNBC was called in those days) identified another potential takeover target.  Mike Milkin and Ivan Boeske and Carl Icahn and a slew of lesser lights tapped Drexel Burnham and the rest of the junk bond market to finance those deals.  As soon as a raider said he was, "Very confident of arranging financing" the bidding wars began.  Stock brokers looked for the next takeover target, the same way they looked for the next Internet stock with rising click volume in 1999.  The rest of the market was strong.  If earnings slowed you'd get bought out. 

The excitement level peaked in 1987.  At the same time the U.S. and world economy began to slow after the explosive gains registered during President Reagan's first term.  China hardly existed from an economic standpoint in those days.  But the rest of the world began fighting for jobs and market share, using their currencies.  Trade deficits rose dramatically in the United States.  The Japanese bought Pebble Beach and Rockefeller Center and a lot of Americans began wondering what was next.

On October 15th the U.S. House Ways and Means Committee approved legislation that eliminated tax deductions for interest costs associated with a corporate takeover.  Perversely, bond yields went up.  The U.S. Dollar went up.  And stock prices started down.  The market actually dropped a few hundred points before Black Monday (October 29th).  The pressure was on.  Once it got high enough the system cracked as program trading and portfolio insurance operations kicked in, amplifying the downturn to record proportions.

None of this means the same thing will happen today.  But the correlations aren't that far off.  And the people in charge seem to have that portfolio insurance mentality, that everything is under control.  The easy money policy is there.  The Japanese are disrupting the apple cart in international finance.  ETFs provide all the protection anyone would need.  And computer trading is more prevalent than ever.  The Flash Crash took the market down for no reason in 2010.  If an actual catalyst emerges, the next swing could be considerably bigger.

The pressure will build over the next 6-12 months as the economy stalls.  If interest rates rise at the same time, fueled by Japan's money printing operation (equal to the U.S. in absolute terms), maybe it will create a phenomenal economic boom, just as they say.  More likely, unexpected problems will rule the day.  The U.S. got part of it right by starting up the adjustment process.  But it left the Federal Reserve Board on the loose.  And it has set a poor example.  The rest of the world now is following its lead.

Our advice is to maintain a conservative investment strategy.  Price-to-earnings multiples for the Blue Chips are at 15x, far in excess of those companies' growth rates.  Corporate earnings in general are beginning to moderate, moreover.  Profit margins are at peak levels.  Small growth stocks are valued at 30x earnings, using the Russell 2000 index as a guide.  That includes non-cash stock option and acquired intangible expenses.  The genuine valuation probably is closer to 25x.  That still is a lofty metric, one that typically marks the top of the range.  Individual opportunities remain.  Worthwhile gains continue to be available.  Still, overall exposure should be measured in light of the macroeconomic situation and the lurking potential for another computer fueled trading meltdown.

Walter Ramsley
Executive Editor

The Adjustment Process - 2013 Outlook

The "Fiscal Cliff" is stealing the headlines as 2012 comes to an end.  That's a side show in our view.  It's virtually certain today's Congress will retain almost all of George Bush's tax code, rather than return to Bill Clinton's.  It's also a sure thing that any spending cuts will be spread over ten years, and that none will occur right away.  The political conflict is simple show business.  Higher tax rates on affluent Americans might briefly impact the country's growth.  But with a complete arsenal of loopholes still in place it won't take long for them to rearrange their affairs to avoid paying the government any more cash than they are now. 

The genuine economic variables are more complex.  Parts of the economy gathered momentum over the second half of 2012.  Housing and construction were especially robust.  That trend appears likely to continue.  Employment figures improved, too.  Productivity bounced back after a temporary swoon.  Exports were solid.  Corporate profit margins remained at elevated heights.  And the U.S. economic engine continued to be fueled by record setting federal deficits and even more amped up financial engineering by the Federal Reserve. Consumer confidence improved.  Households in general continued to deleverage, freeing up discretionary income.  Corporations accumulated cash.  China rebounded.  Japan promised to accelerate growth.  Europe stabilized.  A reasonable foundation was being created despite the political uncertainty.

Plenty of headwinds rose up, as well.  Most of those are natural developments that occur at this stage of the business cycle.  This time around, though, they present greater than normal danger because the initial recovery was so subdued.  The Obama Stimulus in 2009 failed to prime the pump.  Instead, the country's deficits and debt continued to escalate while GDP growth stagnated at 2% on average.  That was 1% below the customary U.S. trend line.  It should have been 1% above, considering the immense stimulus provided.  Under normal circumstances an adjustment process would take place to pay down the debts incurred and end the stimulus, returning the country to a normal everyday situation.  Unfortunately, the economy still is "fragile" by the President's own admission.  A huge shortfall between where we are and where we should be still exists.  But the debt and deficits are forcing an adjustment process, nonetheless.  It just will take place from a weak position, instead of a strong one. 

The upcoming year may be more challenging than some people expect.  The "Fiscal Cliff" negotiations are bound to cause some drag in the form of higher taxes.  Restoring the Social Security tax alone could lower personal income by $100 billion.  High earner taxes might pull away another $150 billion.  And the waiting around is likely to cause significant delays in receiving tax refunds, deferring disposable income further.  ObamaCare taxes will add $25 billion.  Health care costs in general are likely to rise as the law unfolds, moreover, pressuring inflation.  Most economists predict no inflation in 2013.  That forecast could prove optimistic.  The "Quantitative Easing 4" program now being conducted by the Federal Reserve is driving up inflation in foreign countries.  Those nations are buying Bernanke Bucks to prevent their own currencies from rising in value.  That guerrilla trade war could escalate, leading to a larger bubble.  Higher interest rates, higher inflation, higher unemployment, and lower corporate profits all could arise in 2013 as the adjustment process unfolds.

The stock market could react to those unanticipated developments.  Volatility already is climbing, even on positive days.  New issues are performing erratically.  If the Federal Reserve sticks to its guns and withdraws its bond buying program when inflation hits 2.5%, investors could beat a retreat.  Alternatively, the stock market could roar ahead if the central bank keeps fueling the system as inflation picks up.  Our guess is that the economy will slog ahead and fight through the policy obstacles.  A setback is possible as the new taxes and rules and regulations are absorbed.  But there's no reason why the long term outlook should be anything other than bright.

Our advice is to remain invested in a diversified portfolio of high potential growth stocks. 


Walter Ramsley
Executive Editor

January 2, 2013 Update - Congress passes the "Job Protection and Recession Prevention Act" last night.  The legislation looks terrific considering the parameters the lawmakers had to work with.  Our basic view towards 2013 is unchanged.  A poorly written law could have made matters worse.  Fortunately, that does not appear to be the case.  Income tax rates remain at low levels.  The hike on high earners begins at $400,000, twice the level expected.  Capital gain and dividend taxes remain low by historical measures.  Small business depreciation remains accelerated.  The estate tax threshold stays at $5 million.  While social security and health care taxes will rise the overall impact is unlikely to be severe.  Everybody likes to complain about Congress but this time it looks like it came up with a good compromise under difficult circumstances.

The Replacements

We kind of liked the "replacement refs" the NFL hired.  They called the game completely different than the regular refs did.  There was more contact on the receivers as they went out, making it harder to complete all those short Brady-to-Welker type passes.  It was tougher to get open.  That caused the offense to run more often, which was becoming a lost art under the "Fantasy League" rules the regular refs applied.  (We like the running game.)  The replacements also called more pass interference.  They made it easier for the defensive backs to cover the receivers.  But once the ball was in the air they had to play it straight.  The regular refs did it the other way, making it easier to get open but they gave the defensive backs more latitude if they could get to the ball.  All that is a generalization, of course.  The replacements missed a lot of calls.  They had a hard time keeping the game under control.  And they didn't coordinate with each other very well.  It was fun while it lasted.  But once they began to determine the outcome of games, everyone knew it was time for them to go.

The lasting image of the "replacement refs" was in the Green Bay game.  On the final play the defender and the receiver came down with the ball in the endzone.  Either it was a winning touchdown.  Or it was an interception that saved the day.  One ref called it a touchdown.  The other signaled interception.  It's kind of the way Barack Obama and Benjamin Bernanke interpreted the latest economic numbers.

Two weeks ago the Fed Chairman termed the unemployment situation "criminal" and launched another round of monetary stimulus.  He already had leaked his intentions over the summer, provoking a massive stock market rally.  The Federal Reserve Board's intervention probably lifted the Dow Jones Industrials by 1,000 points or more.  Left to its own devices the market might have stayed put, perhaps even declined.  It's impossible to say.  But corporate earnings were peaking and turning lower.  GDP and employment were trudging along, but at unspectacular rates.  And Washington was perfectly happy to continue the "New Abnormal" economic environment.  The politicians were figuring out ways to postpone the "fiscal cliff."  But nothing practical was on the table.

This week President Obama trumpeted the economic data as verification of his team's outstanding performance.  The unemployment rate declined.  The stock market remained at elevated levels.  Interest rates were low.  Everything was looking good.  The country was on the right path.  Re-elect the president.

Touchdown.  Interception.  Whatever.  Our view right along has been that Barack Obama and Benjamin Bernanke have been delivering mediocre results.  It could have been worse.  But in light of the phenomenal resources at their disposal, let's face it, mediocre is terrible.  Up 'till now the two have worked together, perhaps unwittingly, to create an unprecedented fiscal and monetary stimulus that should have resulted in a Super Boom.  In reality, the economy is barely keeping its head above water.  And when the bill comes due for all the stimulus, it's hard to figure what might happen -- but it probably won't be good.

If the Free Market is allowed to operate the United States could zoom ahead to the next exponential level.  There's tremendous technology waiting to be exploited.  There's ample wealth available to finance the required investment.  Despite all the bellyaching it's obvious America's youth is more talented than any generation that's come before.  They'll do it. Just get out of the way and give them the chance.

The stock market is artificially high at this point.  Earnings are pointed down.  The political scene could swing towards a European model for the next four years.  Despite the obvious negatives, our advice is to not worry about it too much.  The regulations and the rules and the intervention into the market and all the rest of it is a pain.  Of course, it would be better to get the real refs back in the game.  But as the Mighty Belichick would say, "It is what it is.  We will deal with it."

It's a problem.  But it's not an insurmountable one.  Stay invested in a diversified portfolio of Special Situation growth stocks.  The future is bright.  It might take longer if the "replacement refs" who run Washington keep interfering.  The long term outlook remains a good one, nonetheless.

Walter Ramsley
Executive Editor

Follow the Money

In our last report we postulated the Federal Reserve would force the U.S. Government to face reality.  Most investors have taken the opposite view, figuring another round of "quantitative easing" will soon be implemented instead.  The cover story there is that more money creation will reduce interest rates further, lift economic activity, and propel stock prices higher, reinforcing the uptrend via the so-called "wealth effect."  A lot of investors also have gained confidence from the prospect of quantitative easing in Europe.  That would entail printing up piles of new cash and using them to finance government deficit spending. 

The money printing might be necessary to keep Europe afloat.  The Continent certainly is in dire straits.  But it won't turn its economy around.  The Europeans will have to get serious and restructure away from their welfare states.  In the United States, more easy money probably would exert a negative effect.  The Federal Reserve appears to be aware of that.  While it might have to provide some liquidity if the Government goes off the fiscal cliff in December, chances are interest rates will begin rising later in 2012 no matter what happens.  The real world fundamentals just don't exist to support any more declines.

Energy costs have turned back up.  Food prices are starting to percolate.  Productivity has been declining for a while and that trend is continuing.  The Federal Government deficit remains elevated.  Medical spending is slated to surge next year as the Affordable Care Act's negative elements start taking effect.  Mortgage write-offs, retirement spending, welfare costs, disability costs, and a wide range of other mandated overhead expenses are surging.  Manufacturing unit costs are climbing as volume stalls and costs continue to advance.  Foreign bank bailouts and other rescue measures promise to strain the capital markets further.

Inflation is set to rise.  The demand for money also is poised to increase.  And it won't be practical to print endless amounts of new cash any more.  That will just make a bad situation worse.  The United States, and perhaps Europe, too, is headed for an adjustment process.  Chances are it won't be nearly as bad as everybody fears.  But it's something we'll have to work through.  There's no free lunch.

How the markets will react is beyond prediction.  If earnings remain on a downward path, though, portfolio allocations likely will switch towards bonds as long term interest rates become more attractive.  Our advice is to remain cautious until evidence develops that the current strategy will succeed; or the adjustment period gets underway.  Change creates opportunity.  An attractive buying opportunity could emerge.

Walter Ramsley
Executive Editor

Sink or Swim

We have been complaining about the Obama-Bernanke Groundhog Day Economic Cycle for a while.  That’s over.  Last Wednesday (June 20) Benjamin Bernanke -- the George W. Bush appointed Federal Reserve chief, who was reappointed by Barack Obama, God only knows why, he’s a Republican after all, and he supervised The Crash, he was in there 2 ½ years before it happened -- decided he’d had enough.

The previous three years he’d given the Obama Administration zero interest rates, $2.7 trillion in created money, a Wizard of Oz type of mind control over Wall Street – “We’ll just print up some more money, don’t worry, be happy” – on top of the $5.5 trillion and counting the President had deficit spent.  And they still couldn’t prime the pump, jump start the economy, just sit down for a day or two and figure out a solution.  Bernanke had seen enough.

Sink or swim.  The better choice would be to swim.  But that’s up to you.

We’ll see how it goes.  If Barack Obama wakes up, “What am I listening to these people for?” and starts thinking for himself.  He’s got a good chance.  This is a crisis situation.  If he takes charge, he wins. 

But if he keeps yacking about the 99% and the 1% and higher taxes and everything is great in America, it’s just a bad income distribution, we need more Latinos, it’s terrible that women doctors earn 12% less than male doctors, we need more gay Marines, let’s put biofuel in our jets, “Well, yes, it does cost $148.00 a gallon compared to $5.00 for normal jet fuel.” 

Maybe that’ll work. 

We’d say the better bet would be, “We got a problem here.  Enough with the niceties.  We’re going to fix things and we’re going to win.”

Walter Ramsley

Executive Editor

Groundhog Day

Groundhog Day Bill Murray played a weatherman who was doomed to repeat February 2nd over and over, at least until he fell in love.  Barack Obama and Benjamin Bernanke could have written the script, except for the falling in love part.  The President and Federal Reserve Chairman have been sending the United States economy around in circles since 2009.  And by the looks of it, Punxsatwaney Phil could be in the picture again this year.  Every year President Obama jacks up the economy with a federal deficit equal to 8%-10% of the country's entire GDP.  (That's a lot.  Jimmy Carter peaked out at 6%.)  In 2012 it's predicted to be $1.3 trillion out of $16 trillion in total output, or 8%.  That's four years running.  Approximately $5.5 trillion of total new debt obligations have been issued over than span.  Doctor Bernanke just unleashed Operation Twist in late 2011, moreover.  In 2009 he cranked up QE-1.  In 2010 he did QE-2.  Last year he also shipped $500 billion of cash to Europe to smooth out their problems.  But all that money hasn't been directed to the American people.  Per capita inflation adjusted income is down -6% since the President took over.  It's gone into the bond market instead -- anyone wonder why Warren Buffet is such a huge supporter -- and from there to every other market, particularly hard assets and commodities.

Print.  Stimulate demand.  Inflate commodity prices.  Crush demand.  Print.  The Obama-Bernanke Groundhog Day economic cycle. The fact most of the money being created is being steered into the capital markets, well, that's good for stock and bond prices.  And it probably was a solid strategy from an economic standpoint at the beginning.  Regrettably, the administration focused all its efforts on a variety of pet projects instead of high rate of return programs like housing, controlling China, and energy.  All that "stimulus" money has gone down the drain, from a practical standpoint.  But it has remained in circulation, pushing consumer prices higher.

 ( Click on Image to Enlarge )

The federal deficit has shoveled $5.5 trillion of new money into the system since the current administration took over.  The Federal Reserve has created at least $2.5 trillion more, probably $3.0 trillion after the latest gambit in Europe.  Despite all that, plus renewed stimulus efforts in Europe and China, real growth in the U.S. is stuck at a 2.0% annual rate.  Personal income growth is zero.  ("You can have a performance review if you want one.  But either way, you won't get a raise.") 

Maybe the American people will fight through the Government's policy obstacles.  The Federal Reserve recently indicated the economy was looking good and more stimulus won't be necessary.  But that's what they said the last three years, as well.  What if the economy can't get rolling?  More deficit spending and QE-3, most likely.  Groundhog Day!

Walter Ramsley
Executive Editor