April 2014 Newsletter to Clients

One has to marvel at the differences of opinion about where the stock market, the economy, interest rates, and the bond markets are headed. Of late, the stock market is heading higher, with the Standard and Poor’s 500 Stock average hitting all-time highs. Ever since the cataclysmic price decline during 2008-2009, when the S&P 500 fell from 1,400 to 700 and scared the living daylights out of the average investor the markets have been moving upward. Now the S&P 500 stands at 1,890 (at this writing).

The naysayers would have you believe a market rising 170% in such a short time must be ready to decline. Many of them have been whistling this bearish tune ever since the stock market recovery began. The economy has been recovering nicely since the end of the recession. Unemployment continues to lag for a variety of reasons, none of which are of great interest except that the Federal Reserve Bank, in an attempt to manage the American economy, will not allow short term interest rates to be market driven. The Fed cannot manage long term rates which have risen dramatically over the past year, proof positive in my opinion that they are experimenting with our economic lives. We would not be in this mess if the Government would stop trying to manage the unmanageable.

Long term bond prices are declining, as those long term interest rates rise. This is not a problem as long as the bond holder is willing to wait for the bond to mature for the return of principal, and it’s earning less interest than is available today. On May 2, 2013 a buyer of the ten-year U.S. Treasury bond was promised an annual return of 1.6%. For instance, today that same purchaser will earn 2.8% for the next ten years. The other matter which is in my opinion a ‘given’ is that America will experience serious inflation in the not-too-distant future. Our government, like all governments which over-spend and create huge deficits, must resort to inflating their way out of debt. History will repeat itself. Many of you will not remember the inflationary spiral occurring during the 1970s culminating with the Prime Rate rising to 21.5% (December 19, 1980).

Harris & Harris Group (TINY), our least favorite investment over the past couple of years, is on the upswing lately, having moved from around $3.00 to near $4, up about 9% today. Six different insiders have purchased TINY shares during March and two of them increased their holdings by more than 10%. Good news about this venture capital company’s portfolio companies has helped considerably. Being one of the premier companies in nanotechnology, the firm has $133-million in assets and no debt. Estimated net asset value per share was about $4.78 four months ago, whereas at least one analyst thinks the intrinsic value is $10-$12. Venture capital investing is really risky and that is why we prefer using a company like TINY for that part of our asset allocation need.

Thank you for your continuing confidence.

Past performance is no guarantee of future results. The opinions expressed are those of Moneywatch Advisors, Inc. and are no guarantee of the future performance of any particular fund. This information is for educational purposes only and is not intended as investment advice. Please consult your financial advisor for more detailed information or for advice regarding your individual situation.