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The Sandy Spring Way

December Observations

November 30th, 2012 | By Beau Mercer

“You can get anything you want at Alice’s restaurant
Walk right in it’s around the back
Just a half a mile from the railroad track
You can get anything you want at Alice’s restaurant.”

Arlo Guthrie-Alice’s Restaurant

The establishment of Thanksgiving as a permanent national holiday is credited to President Abraham Lincoln. Then, as now, it was a time of war, with some families celebrating the return of family members and others suffering from permanent loss. The Thanksgiving holiday may serve as a catharsis to the past nine months of negative electioneering. The elections demonstrate that things don’t change much at Alice’s restaurant!

Walter Isaacson has written books on several notable Americans, to include Albert Einstein and Benjamin Franklin. Mr. Isaacson’s books avoid sentimentality and focus on how the subject influenced the greater whole. On Thanksgiving Day in a Washington Post editorial, Mr. Isaacson referred to the optimism of Albert Einstein for the American way of life which we have forgotten. Mr. Isaacson quoted Albert Einstein who stated that “Americans can be swept by waves of seemingly dangerous political passions. But those sentiments pass, absorbed by its democracy and righted by its constitutional gyroscope.”

The 2012 gyroscope consists of three parts: a dose of capitalism, some economic mobility and a slice of government. The scientist (or Congress) deploying the gyroscope is trying to determine how much austerity pain to take now to reduce the deficit and how much should be deferred. Killing the US economy with too much austerity probably means another recession. The uncertainty surrounding the negotiations enhances the continuing fear of the investment markets that took hold in 2008. Investors have seen $806 billion erased from the value of American equities since President Obama was reelected November 6. The combination of falling stocks and rising profits as the economy recovers has left the S&P 500’s price-earnings ratio below the ending level of eight of the nine bull markets since 1962 and beneath the average of any since Ronald Reagan was in power.

Retail sales affect the stock market because they reflect the health and sentiment of the consumer and investor, but also because they contribute to the growth of the economy and corporate profit. According to the National Retail Federation, consumer sales during the Thanksgiving weekend climbed 13%, wildly exceeding consensus estimates. The November consumer confidence report also evidences an increasing level of consumer confidence and current polls show the lowest level of economic pessimism since 1993-consumers are willing to spend! Maybe, just maybe now is the time to review investments placed in Savings accounts or US Treasuries. Now is the time to project what Abraham Lincoln might advise President Obama: “take a cool view of the general state of our affairs, and perhaps the prospect will appear less gloomy than has been imagined” but now is the time to GO LONG.

John Mellencamp once sang about his approach to life: “You gotta stand for something or you’re going to fall for anything.” Democrats and Republicans stand for something which makes consensus difficult. Clifford the Big Dog needs to growl at the media about the implications of failure to act. Odds are that the politicians will avoid the fiscal cliff aka Clifford the Big Dog, offering a late 2012 gift to the markets. Conversely shoppers are not concerned about Clifford, but the economy does not forget that raising taxes or cutting spending will lessen the pace of growth. An austerity policy will be implemented before the next shopping season if the US is going to avoid the issues affecting the European Union.

So far this year large US corporations have successfully maneuvered from one crisis to another. Profit margins and corporate profits of S&P 500 companies as a whole have risen to record levels. Third quarter earnings reflect both increased productivity and efficiency. Our hope is that many of the uncertainties will be resolved and a relief rally in the markets results. Remember what Alice serves for Christmas dinner.

Have a Happy Holiday,
—Fred