Hutchens Investment Management: “Cyprus, Are You Kidding?”

CONCORD, N.H. - March 18, 2013 - PRLog -- As the futures indicated over Sunday night, the next big sell-off could be triggered by the EU’s taxing of Cypriot bank deposits as part of the bailout of Cyprus. Are we back to headline news focused on sovereign debt for a county whose GDP is 0.25% of the EU?  As part of the 17 billion euro survival package to Greece’s closest relative, the EU is demanding depositors share in the burden to the tune of 5.8 billion euros.  It does not take much research to conclude that this “punishment” to depositors is grounded in money laundering. East Europeans, primarily Russians, have long used the Cypriot banks to illegally wash dirty money and turn it into euros.  Led by a fraction of the EU, this German initiative is nothing more than a penalty for their actions.  It will take more than this type of news from CNBC and Bloomberg to shake the stock markets underpinnings, according to David Minor of Hutchens Investment Management.

Over the past few reports, we have touched on the slow-but-consistent growth of the private sector.  This reality has been accompanied by a growing negative theme that the US is losing its competitive edge.  Accordingly, impediments to growth, real or imagined, will erode the US economy and debt will keep future generations from obtaining or even attempting the “American Dream.” The current federal debt level is a concern in light of an Administration that does not see it as problematic. The dysfunction of our Congress only adds to the fear.  There is no doubt that the political system is broken, but finally the effects of the financial crisis are receding. The good news is that beyond the Beltway no one is waiting for the Federal Government to fix the economy. We are beginning to see light at the end of this long tunnel which we believe is what the stock market is discounting.  

All the problems are well-known; entitlements, infrastructure, education, and over-regulation.  But, America has not stopped innovating. In fact, R&D spending has grown rapidly and patents relative to population are at historic peaks. Nowhere is the innovation more obvious than in energy.  Fracking for oil and gas has made energy independence a reality.  For example, along the Marcellus Shale, which stretches 600 miles from New York to West Virginia, Pennsylvania has added 100,000 jobs and last year issued permits for 2500 wells, of which 1,365 were drilled.  Pennsylvania is just one of the states benefiting from shale-gas drilling; others are Arkansas, Texas, North Dakota, Louisiana, Oklahoma and Kansas. Cheap gas translates into cheaper electricity. America’s pipeline network creates a national market for natural gas enabling factories far from the drilling to benefit. As the price of natural gas remains low, exploration and drilling for oil is increasing. While shale oil has increased global oil production by only about 1% it has cut the US trade deficit by $70 billion, or 10%.  

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 an impending deadline. 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.