Full Steam Ahead Into Earnings Season-Income Investors Can Look To The Hartford Stag

The economy has been in the ICU now for over two years. It’s been coddled, medicated and stimulated. Much like a patient in extreme pain. Morphine is administered at drips initially and slowly increased as the body builds up a tolerance to it. Eventually the dosage necessary to ease the pain overcomes the patient entirely. So what soothes the patient’s pain ultimately leads to his demise. The same may be true with stimulus. The initial injection works wonders and we get a super high. The next drip, less so and so on. My point, the next, if needed, dose of quantitative easing or stimulus must be targeted and provide such a jolt to cure the patient or else.



The economy has entered into a “new” phase or as Pimco’s CEO Muhammad EL-Erian references a “new normal” of subpar growth. I would argue that assessment, but I still argue that peanut butter and chocolate don’t go together no matter that Reece’s Cups sale suggest otherwise. I believe the US economy is in a self orchestrated restructuring, accelerated by the financial contagion. Over the last 25 years corporate America has invested hundreds of billions in technology and further educating our workforce. They are reaping the rewards of their investments now. The US has the best most productive workforce anywhere. We also operate in a virtual, ‘just in time’, inventory environment.



Our success though has morphed into an albatross or an anchor around our necks. American productivity is at all time highs. This means existing workers are being asked or demanded to work harder and more efficiently than ever before and are responding and up to the tasks. Investments in inventory management are paying off handsomely also. Inventories are lean and should remain so. Why should companies stock or overstock shelves and cross their fingers the consumer will show up? From a corporate view, that’s wasted money sitting on those shelves. Now, due to their aforementioned investments, this is no longer necessary. Everything is virtually a phone call or mouse click away from factory floor to showroom shelves. So, as we transition to this next phase of our economy, lean inventories and stubbornly high levels of unemployment should linger.



What’s ahead? Change is in the air. The Republican Party should route the Democrats in the upcoming midterms. I say this from a politically neutral perch. My job is to remain politically neutral, unbiased, unemotional and seek to navigate the markets regardless of whom or what party charts our direction. That being said, there is not a chicken in every pot. People are being evicted from their homes (rightly or wrongly) in record numbers, with diminishing hopes of reentering the work force. In short, they are unhappy. The Democrats are in control, and so they should receive the brunt of that discontent, and get unseated. Based upon this not so scientific approach and not some party biased poll suggesting otherwise, I believe the Republicans will retake control of the House and Senate restoring the check and balance between the Hill and the White House. No more rubber stamping either party’s billion dollar pet projects. Let’s hear it for gridlock!



Stimulus II? Our elected officials, sensing the unrest amongst their constituency have been floating the idea of another round of stimulus. Stimulus II. Actually their count is off. Remember President George W sent out those gift checks just for being Americans. No, the stimulus we receive, should most likely come in the form increased exports and an expanding domestic clean energy sector. Both should spur job growth and domestic consumption. Next we should initiate another tax holiday to encourage Global US companies to repatriate their foreign dollars, some estimate to be in excess of $700 billion, sitting overseas. Once back on our shores, companies could reinvest those dollars in new factories and hires. Increase dividend payout and stock buybacks etc. Next, we must end the madness as a government with regard to reckless spending. Just because we/they have a credit card doesn’t mean it needs to be maxed out every month. Sooner or later your credit score gets impacted and your card revoked. That day of reckoning is a good distance down the road for the US of A, and most likely not in our lifetime, but it simply cannot be ignored, and it must be dealt with now to keep it out there.



The next few weeks should be very interesting. We are in the process of ramping up earnings announcements which should create a strong backdrop for the current rally and strengthen the argument for higher valuations. The Federal Reserve is threatening/telegraphing, their intent to remain vigilant in their knock down drag out fight, (one which cannot afford to be lost) against a deflationary death spiral. The rebalancing of power in D.C even if control is lost in only the House or Senate should be enough. All three ingredients combined could lead to a powerful move to the upside. I’ll continue to monitor the economic landscape and earnings results for warning signs. For now, investors, both individual and institutional remain underinvested as a whole. There remains $7 trillion sitting on the sidelines. Time is running out to reach their year end targets, which works to the benefit of our aggressively invested posture.

Many insurance companies got caught up in the near collapse of our financial system. Banks and Insurance companies alike are clawing their way back from the edge of the abyss. One such company, Hartford Insurance still has work ahead of itself but appears to have turned the corner. The company's annuity business is a cash cow and as insurance premiums begin to firm up after a long painful soft market investors can sit back and collect a very attractive 7 1/4% on the convertible preferred. In the current zero interest rate environment that's a home run in my book.

In a note of full disclosure, I may already own or look to own in the future shares of HIG-A for myself or my clients. Before making any investment decisions please do your own due diligence and contact your investment advisor or myself.




Have a terrific day and a wonderful week!