Bob Feller is widely recognized as one of the greatest pitchers to have ever played the game. Yet few know he was also the first MLB player to enlist in the military, following the attack on Pearl Harbor in 1941. With a great career in front of him and a father dying of cancer, he chose to make the selfless sacrifice to protect our great country.  Bob Feller was decorated with six campaign ribbons and eight battle stars, while serving on missions in both the Pacific and the North Atlantic. He is the only Chief Petty Officer in the Baseball Hall of Fame.  When asked what the most important game he ever won was, Feller replied – World War II.

Every year, members of the Bob Feller Act of Valor Award board, with the assistance from all 30 MLB organizations, will nominate one player from their respective teams, vetting each nominee. Each spring, the board will announce the three finalists  in Cleveland, Ohio. Additionally, there will also be one member of the Baseball Hall of Fame nominated to represent the distinctive group that Feller exemplified.  The United States Navy will also nominate service men and women for the award, with a vetting process conducted through the Chief of Naval Operations in Washington, D.C. A representative of the United States Navy will present the award to the Command as they see fit.  Each of these chosen individuals will represent the dignity and integrity shown by Feller himself.

We are enthusiastic supporters of our military, particularly those who have given up fame and fortune to serve their common man as folks like Bob Feller and Louis Zamperini have done.  If we can help identify those who still stand for such ideals in the ranks of professional sports and our military, we want to be a part of it.

If you or someone you know would like to join this cause and get in on the ground floor, please send us an email or give us a call.  Please also see the links listed below for more information.

http://actofvaloraward.org/
https://www.facebook.com/ActofValorAward
http://cleveland.indians.mlb.com/news/article.jsp?ymd=20130328&content_id=43433048&vkey=pr_cle&c_id=cle
http://mlb.mlb.com/news/article.jsp?ymd=20130328&content_id=43432938&c_id=cle
http://www.cleveland.com/tribe/index.ssf/2013/03/mlb_navy_combine_for_annual_bo.html

Best Regards,

Doug MacKay, CEO & CIO
Bill Hoover, President
Mike Czekaj, Research Analyst

In our experience, it has usually been a poor decision to buy defensive stocks like Procter & Gamble, Johnson & Johnson, and Pepsi after they’ve had a strong run, as has been the case in recent weeks. While high dividend paying stocks are attracting some demand given the low interest rate environment, we believe a greater portion of the rally may be based on the expectation of a looming recession or, at the very least, a fourth year in  a row,  summer stock market swoon.  Recent earnings results in the past week from Procter & Gamble and Amgen suggest that the rally isn’t related to new innovation or improving fundamental growth rates at these companies.  In the absence of an economic collapse, the moves may prove unsustainable.

What happens if  the economy, rather than deteriorating in the next six months, continues to make steady progress, neither falling off a cliff, nor working its way into a frenzied, upside breakout?  What if, after years of pain, the improving housing market really is a sign that the economy is on the mend and while not gangbusters, is sustainable at an albeit slower than historical rate of growth?  What if, after worrying about higher tax rates and cutbacks in federal spending, employment still manages to improve?

What if there is more to life than the next quarterly earnings report, the next marginal bracket in the tax code, or where we are in the bump of Laffer’s curve?  What if, in spite of the argument that we could be growing faster than we are, we still do grow?  What if deflation rather than inflation really has been the greater risk and Bernanke deserves our praise?   What if monetary experts discovered new policy tools that our kids will read in the economic textbooks of tomorrow?   What if, in spite of all we think we’ve come to know, it remains true that we don’t know everything and that the world may be far more resilient than we care or perhaps even choose to believe?

Our economic outlook remains as it was at the beginning of the year.  The recovery in housing, corporate profits, and stock market levels suggest that the US economy is finally moving into expansion territory.  We concede that an expansion of historical magnitude is unlikely as long as corporate boards are so laser focused on increasing dividends and buybacks at the expense of new growth initiatives.  The downside of Fed policy may be that the stock market has to serve a more utilitarian purpose than it has in recent decades by providing an income stream to retirees where there are no alternatives.

It is no secret that our banking system, while healing, remains strained.  With real interest rates below zero, further cost cuts need to occur to return banks to their historical levels of profitability.  They are also still largely hesitant to lend.  Who might pick up the slack?  The non-financial sector, for one.  The rest of corporate America is flush with cash and eventually the purse strings will come loose, just as private equity has done by sopping up the excess supply in the housing market and turning many into rentals.

What themes might attract new growth capital?  Technology is one to be sure – social networking, the advent of anytime, anywhere video and changing advertising models are all growth areas.  Breaking Bad, The Walking Dead, and the company of Madmen are no longer simply 9pm Thursday only affairs, but are available anytime on Netflix with the  guidance of friends on Twitter and Facebook.  New applications of social networking technology are yet to be discovered, as the recent capture of the Boston Bombers shows.

In the consumer discretionary sector, ecommerce continues to take share from the offline world through price and convenience and, after decades of industrialization, those living in the emerging markets will increasingly want to consume.  While low cost energy supplies haven’t changed the landscape of industrial America quite yet, it is an area worthy of investment, not only for the jobs it will create, but because its bridges won’t be built to nowhere.

So, that’s our bet.  As has occurred in each of the last three years, the economy should continue to plug along, not as we might like it to be, but as we can reasonably expect.  Growth scare or not, we suspect that the end of 2013 will show that continued progress lies ahead, but perhaps not exactly in the same pattern as it has thus far.

Kindest Regards,

Doug MacKay, CEO & CIO

Bill Hoover, President

Mike Czekaj, Research Analyst

For the complete list of firms, click here.

Our long term results – over the past five years and since inception – remain strong relative to the S&P 500 and other large cap growth managers on a net of fees basis.

For details on our firm’s performance results, our investment outlook, and related disclosures, please read the attached Performance Review.

Enjoy!

SOCIALISM
You have 2 cows.
You give one to your neighbor.

COMMUNISM
You have 2 cows
The State takes both and gives you some milk.

FASCISM
You have 2 cows.
The State takes both and sells you some milk.

BUREAUCRAT-ISM
You have 2 cows.
The State takes both, shoots one, milks the other and then throws the milk away.

TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.

VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.
The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company.
The annual report says the company owns eight cows, with an option on one more.

AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has died.

A FRENCH CORPORATION
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three cows.

AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.

A SWISS CORPORATION
You have 5,000 cows. None of them belong to you.
You charge the owners for storing them.

A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment and high bovine productivity.
You arrest the newsman who reported the real situation.

AN INDIAN CORPORATION
You have two cows.
You worship them.

A BRITISH CORPORATION
You have two cows.
Both are mad.

AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
Nobody believes you, so they bomb the crap out of you and invade your country.
You still have no cows but at least you are now a Democracy.

AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.

A NEW ZEALAND CORPORATION
You have two cows.
The one on the left looks very attractive.

A GREEK CORPORATION
You have two cows borrowed from French and German banks.
You eat both of them.
The banks call to collect their milk, but you cannot deliver so you call the IMF.
The IMF loans you two cows.
You eat both of them.
The banks and the IMF call to collect their cows/milk.
You are out getting a haircut.

Allow us to explain.

The Dow Jones Industrial Average and the S&P 500 indices do not include the compounding effect of dividends paid by member companies.   Any retiree will tell you that dividends represent a return of capital and useful income in the real economy.  If you had reinvested those dividends back in the index as they were paid, the old time highs reached in October of 2007 likely would have been passed some time ago.  (View a printable version of this Economic Update: Flying High).

According to my calculations, the Broadleaf Growth Equity Portfolio (BGEP), which generates only a small amount of dividend income, exceeded its all-time high last July.  On a similar measure, while the S&P 500 index remains four percent below its all-time highs, the total return index which includes dividends, likely exceeded those highs last August.

Why does this even matter?  For two reasons.

One, the claim that the stock market has hit all-time highs is needlessly scary to a whole lot of people.   If the common indices – including dividends – hit new highs as much as a year ago, then not only are reports of all-time highs old news, but the reality might even serve as an encouragement rather than a deterrent to new investors.  By my math, after hitting new highs nine months ago, the stock market has made further gains, to the tune of an additional ten to fifteen percent!

Two, dividends do matter, but even more so today.  Because of the Fed’s zero interest rate policy, dividend increases have been on the rise as a means of attracting yield hungry investors to common stocks.  According to Francois Trahan, Chief Investment Strategist at Wolfe Trahan, 80% of stocks now pay a dividend and over 50% of the S&P 500 pays a dividend yield higher than the 10 year treasury, which is currently in the 2% range.   A generation ago, the composition of interest and dividends to personal income was likely an 85/15% split, but because of the Fed’s zero interest rate policy large corporate cash hoards, and a retiring baby boom generation, that ratio may be closer to 50/50 today.

Regardless of when we hit new all-time highs, some cynics still insist that the stock market’s gains are pure fantasy, created solely by the Fed’s loose money policies.   To be sure, interest rate policy does influence the stock market, but so do corporate earnings.  If the recent new highs in the stock market were solely a function of Fed manipulation, we wouldn’t expect corporate earnings to be hitting all-time highs.  But that, in fact, is what they have done.

Where are stock prices largely not at new all-time highs?  Partly in those sectors which were responsible for the last earnings bubble, namely the homebuilders and the banks.  Not too coincidentally, earnings for both of these industries remain well below their peak levels, which also suggest that earnings do still matter and that the current highs in the stock market as a whole aren’t solely a function of the Fed’s easy money policies.

Our view of 2013 remains the same.  The economy is finally in expansion mode – a slow one to be sure – but an expanding one nonetheless.  This implies that corporate earnings and the stock market are close to or have already reached their prior highs and are now “expanding” into new uncharted territory.  Historically speaking, it is true that economic contractions and recessions typically follow periods of economic expansion, but it is equally true that investors are notoriously poor at timing such shifts.

Our gut tells us that the current expansion might last longer than most expect, simply because it is also a slower expansion than we’re typically used to.  Economic slack still seems prevalent in the overall environment and the Fed’s easy money policies very much intact.  Until the Fed believes it has successfully landed on the dual mandate runway of full employment and price stability, low rates will likely remain as they are.  Higher interest rates, either due to a shift in Fed policy or natural market forces, might be the first signal that an economic contraction might be just around the corner.

For now though, we still see higher highs.

Kindest Regards,

Doug MacKay, CEO & CIO

Bill Hoover, President

Mike Czekaj, Research Analyst

If the video above doesn’t work, click here.

For those of you unable to catch it live, a link to the video will be posted to the website when it becomes available.

As a former tech fund manager, I often forget that I may have an opinion worth sharing.  On that front, I think these years will be looked at similar to the transition from DOS to Windows in the PC era, marketed by what I will term “subnet” experiences.  By this, we will move to an era where users identify specific internet brands with their first point of customer contact.  No longer will they Google everything and see a DOS like report of sites that might interest them, but if they are shopping they will go to Amazon or Ebay, if socializing FB, if professionalizing perhaps LinkedIn.  Like history, certain leaders are materializing to serve certain aspects of our lives.  GOOG took us through the Wild West Frontier, but now some towns are being developed in the FB, AMZN, LNKD spaces.

Maybe a way to think about value is to think about what portion of a typical day you typically spend in each “subnet experience;” how much time do you work, how much time do you shop, how much time do you socialize?  The bubbles of opportunity may correlate within each of those real estate properties.  Google will still be relevant and may ebb and flow in relevance based on the integrity of the towns and what they offer.  It is more difficult, however, to see where GOOG fits in than where it used to be and this transition could very well resemble how Microsoft felt about the launch of the internet.  Bill Gates was all over that transition with Internet Explorer and handled it well, representing the undoing in Netscape.  But they haven’t transitioned well ever since.

Right now, you use GOOG if you are looking for something.  But, the more you have an idea for what you are looking for on your own and the brands that could satisfy those needs (i.e. I need shoes and Nike is the brand), you will increasingly go to the “subnet” that provides the greatest ease and convenience.  (I trust AMZN on price and offering so I will go their first.)  My friends are on FB and they may be a better place to check on cool new restaurants in the area.

GOOG has properties to be sure, but less destinations in terms of time spent using them.  They are moving but are often second movers in many things except search.

Broadleaf Partners, LLC owns or may own positions in FB, GOOG, AMZN, LNKD, and EBAY.  Thoughts that we share in this environment are not to be construed as a recommendation to buy or sell the securities in these or any other companies.  We reserve the right to change our opinions and thoughts on these companies at any time in the future, with or without subsequent notice.  The advantage of an internet based environment for sharing ideas is that we can more efficiently do so in two directions.  To that end, we would welcome your thoughts and opinions on anything that we post, but also reserve the right to edit any content that we deem inappropriate.  Thanks for your interest in Broadleaf Partners.