As far as the big picture goes: “We believe the economy is still in recovery and if Washington can stay out of the way, Americans will figure out a way to thrive.”
As far as the short term goes: “The immediate risk facing the markets is the so-called fiscal cliff which is a combination of broad tax increases along with pretty draconian cuts to the defense budget.”
“The wild cards here are the unelected agencies, in particular the EPA, that could interfere and put industries out of business. We will be avoiding anything related to the coal industry, and watching closely for any new regulations on natural gas “fracking.”
- Drug Companies– Kip predicts there will be billions added to health care spending and the effects will be wide spread among the industry.
- Mid to Lower Grade Corporate Bonds– With interest rate risk taken off the table for a while, higher yielding corporate bonds look attractive.
- Fast Food & Discount Stores– With unemployment remaining elevated, frugality will continue to be the theme for many Americans.
- Technology– It’s no surprise to find that we have become addicted to our gadgets. The rapid pace of change in this sector defies legislators’ ability to get in the way, making it a pretty safe bet during this administration.
- Banks & Brokerages– The effect of near zero interest rates, higher capital requirements, and onerous, yet-to-be-written Dodd Frank requirements mean that top line growth will be hard to come by. In addition, brokerages are dealing with the lack of enthusiasm by the individual investor, and Kip sees this as unlikely to change in the near future. As these companies make up a large part of our economy, look for select companies and opportunities, but expect returns to be underweight for the time being.
- Consumer Discretionary– Discretionary big ticket purchases are likely to remain subdued in the economy predicted.
- Payroll Processors– With unemployment remaining high and near zero interest rates, growing revenue will most likely be a challenge for established companies.
- Coal Companies– At Fiduciary Capital, we are avoiding anything related to coal as we predict tighter regulations coming down the road.
- Health Insurers– Some may disagree as many new customers will be added to the insurers books. However, we foresee that as being offset by two factors:
1) Insurers must cover everybody including those with expensive pre-existing conditions
2) When Insurers try to raise premiums, the government may respond with more regulation. The end game to turn these insurers into a regulated industry similar to utilities will require a longer process to justify rate increases.