Monday, January 02, 2006
The headlines will report that the Dow Jones was down for the year by .6%. The headlines will not be accurate. Adding in the 2.3% average dividend yield of the DJ 30 for the year, the actual total return was 1.7%. I think most of us would have taken a positive return for the year, if in the first week of 2005, we would have been told that the year would see oil prices at $70, incredible devastation from the hurricanes that shut down parts of the country, inflation reaching 4%, eight rate hikes by the Federal Reserve, and the downgrading of General Motors and Ford to junk bond status. You won't find much good news about stocks or the economy in the millions of words that will spew forth from the main stream media about 2005. Throw in the slide in the President's ratings and the retirement of Alan Greenspan, and we could have the makings of a outright pity party on the front pages of Time, Newsweek, Business Week, The New York Times, The Washington Post, and The Los Angeles Times. But, as usual, the main stream media does not get it, and because of that, many American's won't either. That is a very distressing reality. In my travels over the Holiday season, I have spoken with many people who parrot the media's pity party, and I am amazed that people can be so well informed of the woes of the economy, so incorrectly. In my early years in the investment business, I would devour Business Week, Forbes, and The New York Times (Sunday) for the "inside scoop" on the economy and stocks. I know now that what I was reading was at best "an angle" of the truth, and not the real thing. It took me a long time to learn that when it comes to making money "an angle" of the truth is about as worthless as a lie. The real stories of 2005 were the incredible resiliency and strength of the US economy, the remarkable ability of corporate America to control costs and produce profitable growth, and the pluck of US consumers. Nowhere are you likely to read that US GDP growth was near 4%, almost 25% ABOVE the average annual GDP growth of the last 80 years. Lost in the noise of the flat year for stocks will be the fact that S&P 500 profits likely grew by nearly 13%, and overall US after-tax corporate profits were up near 20%. Dividend growth of near 10% will likely be completely ignored. Overshadowing worries about outsourcing and layoffs, the US economy produced 2,000,000 new jobs in 2005, as the unemployment rate fell from 5.4% in 2004 to 5.0%. Also ignored will be the single most important statistic on the face of the earth -- almost 70% of US citizens own their own homes, more than at anytime in the history of the world. The main stream media's biased reporting of politics has been exposed, and they have seen a collapse in their subscribers, as people seeking the truth about political claims have moved on to reliable internet blogs to find the facts. The main stream financial press is next. They are "underreporting" the strength of the US economy. I do not blame the media for the flat performance of stocks, but they are entirely wrong in their supposition that the flat stock market is a sign of a weak economy. The flat stock market, in my judgment, is a psychological phenomenon resulting from the uncertainties of 2005 and a desire to "not fight the fed." In my judgment, 2006 will be another year of solid economic data. I expect GDP growth to be near 3.5%, which, although above the 80 year average of 3.1%, will allow the Fed to go to the sidelines. A somewhat slower economy will also take some pressure off of energy demand, allowing oil prices to fall modestly. 2006 will be another good year for job growth, albeit somewhat slower than this past year. There will be surprises in the year ahead; there always are. But the free market economy that the United States possess has proven over and over that it is much more resilient than the main stream media understands. It is a job creating engine, it is a wealth creating engine, and it is an innovation producing engine. If you stand back far enough to get away from the odor that the mains stream media emits, you might think things are pretty good for the average American. If you have reached a place in your life, where you understand this, it is a very short trip to the notion that a flat stock market does not reflect the value that was produced in the US economy in 2005. I believe the current price of the Dow Jones 30 is at least 15% below its value, and that is not including 2006 earnings and dividend growth. In my mind it is just a matter of time before price and value intersect.