News from Hutchens Investment Management

March 5, 2013 - PRLog -- Hutchens Investment Management:

“NO ONE CAN ESCAPE THE INFLUENCE OF A PREVAILING IDEOLOGY."  -- Ludwig von Mises

Naples FL – (March 5, 2013) - President Obama and members of his Cabinet, as well as Democratic Congressional leaders, spent endless hours predicting the dire effects of their own policy.  As the date approached, the lead from behind President, always politically astute, backed off. The equity markets, despite constant reminders by the popular press of the impending consequences, moved closer to record highs. Why then did stocks not reflect such a seminal event as the sequester? The short answer, while sequester is not the answer to our debt problems, and as imperfect as it is, nonetheless it is viewed by many as a step in the right direction, according to David Minor of Hutchens Investment Management.

What is needed to stabilize the level of debt-to-GDP is much more far reaching than a 2½% cut in the growth of government spending. In reality the government has three options:  (1) Make substantive cuts in spending and/or raise taxes, this is political suicide for Congress and neither side is willing to do anything to jeopardize their own jobs.  (2) Make meaningless moves in the right direction having no long term effects on the outcome as the debt-to-GPD grows larger (sequester).  (3) Employ a strategy of inflationary growth that will cut the debt-to-GDP ratio.  This seems to be the course the Federal Reserve prefers, holding rates low until unemployment reaches 6.5%. Our own studies show that equities perform well in a sub 3½% inflationary environment. Couple this with real GDP growth of 3% or higher and the debt-to-GDP ratio eventually returns to manageable levels.  Of course there is always the fourth option of default.

Shorter term the economy is doing better than most economists predicted. The housing market continues to improve as the bottom turns up in an environment characterized by a 34% increase in homeowner affordability; in fact 133 of 134 markets are underpriced from a payment/income status.  New home sales were 15.6% above year ago levels in December, but at 437K unit annual rate, they were only 1/3 of the record levels of 2005.  Today, with mortgage rates at historical lows, prices would have to rise 28% nationally to equal the average affordability of the past 10 years.  The Fed’s unprecedented intervention in the mortgage market has created a potential for rapid price appreciation if option three listed above occurs. Somewhat related to the improvement in residential housing is the increase in consumer confidence. According to the Conference Board, in February the Index rose 11 points to 69.6 with expectations rising 14 points.  Also, the ISM Manufacturing Composite reached a 20-month high of 54.2 with growth in 15 of the 18 sectors with improvements in orders, production and inventories.  

Our investment strategy is a full position in equities. The recent run-up since the beginning of the year and a more bullish sentiment for equities opens the possibility of a short-term correction as budget negotiations approach the deadline in the latter part of March. But in the longer term this is inconsequential as growth with a dose of inflation will be the ultimate catalyst for a sustainable bull market and deficit reduction.