"Value Stocks - Increasingly Attractive", "A Letter from Ahmadinejad to Obama", "Finally, A Sensible Answer to the Budget Crisis"

Sydney M. Williams

Thought of the Day

“Value Stocks – Increasingly Attractive”

”A Letter from Ahmadinejad to Obama”

“Finally, a Sensible Answer to the Budget Crisis”

April 16, 2010

That the economy is improving is increasingly becoming conventional wisdom. Fed Chairman alluded to that fact in recent testimony. His words were echoed by Janet Yellen, President of the San Francisco Fed and recent nominee to become Vice Chairman in a speech yesterday. Thus far, the Fed has maintained a posture of keeping Fed Funds between 0 and 0.25%. In her speech yesterday, Ms. Yellen said, “overall financial conditions have improved substantially.” She added that she agrees with the Fed’s accommodative policy, due to the economy continuing to operate below its potential, subdued inflation and persistent high unemployment. But she did say that she feels the economy will continue to accelerate over the balance of this year and through 2011. She added, toward the end of her speech: “At some point though, as the economy continues to expand, the Fed will have to pull back some of this extraordinary stimulus.”

Byron Wien, in his Market Commentary, agrees: “The Federal reserve may respond to the renewed strength of the economy and begin to tighten.” He also points out that our, “borrowing needs are huge [and] our savings rate is low”, suggesting higher rates may be necessary to attract investors.

An improving economy, with bond prices looking relatively less attractive, should be positive for stocks, especially for those in the “value” category. According to a recent note from Jim Cullen of Schafer-Cullen, thus far in the thirteen-month rally, companies with earnings have underperformed those without and the bottom 20% of stocks based on P/E ratios have underperformed those with higher P/Es. In his note, “Time for Value?”, Jim also points out that the earnings yield on the 20% of stocks with the lowest P/E is now 8%. And that premium over the Ten-Year Treasury has only been higher two times in the past seventy years. A similar argument was made at a recent portfolio manager dinner in Boston.

………………………………………………………………………

In a front page article yesterday, the New York Times headlined a story, “Obama Speech Signals a U.S. Shift on Middle East”. Their argument is that events in the Middle East are interconnected and that our travails in Iraq and Afghanistan, and the growing risk of a nuclear Iran, are creating a fissure in relations between the U.S. and Israel. In referring to the impasse in negotiations, Mr. Obama said they “create an environment that [contributes] if you will to the overall environment within we operate.”

On Wednesday, Stratfor reported that Iranian President Ahmadinejad is sending a letter to President Obama suggesting that only an understanding with the Iranians will allow the U.S. to achieve its goals in Iraq, Afghanistan, the Palestinian question and Iran’s nuclear ambitions. Stratfor does not totally dismiss this communication as the ravings of a madman and points out the comparison of Richard Nixon and China in 1972 – the visit of a notorious anti-communist to the cradle of communism. It is an attempt by Mr. Ahmadinejad, in the words of Stratfor, “to use American weakness to its advantage.” The odds are that the note will be ignored, but no one can doubt the complexity of the problem and it is worth watching.

In the past, we have made compacts with the devil. In my opinion, the more apt analogy would be the decision of Churchill and Roosevelt to enlist Joseph Stalin as a partner/ally in the bid to defeat Hitler. Hitler was defeated and Nazism died, thank God. But the price paid included the lives of millions of Eastern Europeans, as well as the enslavement of the survivors for two generations. Any agreement with Ahmadinejad would extract an even higher price.

……………………………………………………………………

In what is probably America’s best newspaper, The Onion, the headline in this week’s issue read, “U.S. Government To Save Billions By Cutting Wasteful Senator Program”. The article points out that last year $450 billion was “funneled into the chamber, an amount considered fiscally unsound considering how few citizens actually benefit from its existence.” The reaction so far, to the concept of eliminating that august body, “has been overwhelmingly positive.”

It is amazing that it takes “America’s Finest News Source” to come up with the first practical suggestion for reducing the budget deficit.