Strategy Update – April 2011Submitted by Stonebrook Capital Management on April 28th, 2011
“It is important to note that the combination of a cheap dollar, a very innovative corporate sector and a highly productive labor force have reinvigorated the manufacturing sector, leading to the reindustrialization of the U.S. economy. There is no reason to expect the manufacturing boom to come to a sudden halt. In fact, manufacturing as a share of the U.S. economy has been rising over the last two years, the first time it has done so in the last four to five decades.”
-BCA Research Global Investment Strategy
The reindustrialization of America is an important reason for our continuing optimistic view on U.S. stocks. While the S&P 500 index has nearly doubled from the once in a lifetime low of March 2009, we think US stocks remain in a sweet spot because of the slowly recovering economy, accelerating job creation, export growth spurred by the cheap dollar, interest rates near zero, and very low inflation. We are finding attractive opportunities in innovative entrepreneurial companies at reasonable prices. For example, holdings such as Apple Inc. and Chipotle Mexican Grill have performed well, but in our opinion their stock prices still do not fully reflect the rapid growth coming from new products and new markets. We’ve recently added positions in Rightnow Technologies, a producer of customer relationship management software and Tesco Corp, a designer, manufacturer, and servicer of technology based equipment for the oil and gas industry.
Despite our favorable view of the economy and the stock market, we are mindful that risks to the global economy are elevated. High oil prices, revolutions in the Middle East and Africa, and the ongoing crisis in Japan all pose specific risks to global growth. We feel that proper diversification across asset classes and risk management are key in this environment.
As we indicated last quarter, we are quite pessimistic on bonds. We are reducing our bond allocation and shifting the remaining bond investments into areas such as floating rate notes that are less vulnerable to rising interest rates. While we don’t expect the Fed to begin raising rates soon, the first increases could occur earlier than the markets currently expect.