Data Indicate Recovering Economy in the U.S.; Struggling Economies Internationally

Jim HardestyThe US economy continued to strengthen in the fourth quarter of 2014. Further momentum in the domestic automobile sector, particularly from truck sales, resulted in annualized vehicle sales of 17 million, very close to the all-time highs of 2005. Gross Domestic Product advanced 5.0% in the third quarter, the strongest performance since the recession of 2009. Consumer Confidence reached 92.6, up from 77.5 a year ago, a very sharp confirmation that the economy is on an upward track. Other economic indicators, including inventory levels, operating ratios, and vendor performance all confirm that the recovery is strengthening.

As positive as the news is on the domestic economy, the rest of the world has experienced a sudden, and in some cases, sharp contraction. European economies have retreated, particularly in Italy, Greece, and France. European central bankers have responded by dropping interest rates, which are now lower than those in the United States, signaling weakness and significant deflationary trends. In some of these southern European economies, unemployment rates for those under 25 now exceed 20%. (more…)

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Rough Tides… Then Smooth Sailing 

Jim HardestyIn the third quarter, the economy continued to rebound from the disappointing weather-impacted first half of 2014. After a 2.1% decline in GDP in the first quarter, second quarter results indicate an increase of 4.6%. With this increase, there are signs that growth in the economy is beginning to accelerate. Car and truck sales have strengthened to a 16.3 million unit rate, nearly matching the prerecession record. Durable good orders in August were 9.0% above a year ago led by huge increases in aircraft orders. Other encouraging news was the continued improvement in consumer confidence (+13.0%) and an increase in leading economic indicators (+7.7%).  (more…)

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Moving to Hunt Valley

Dear Clients and Friends,

Since its founding, Hardesty Capital Management has enjoyed almost 20 years in historic Mt. Vernon, one of Baltimore City’s most unique and historic districts. Our East Read Street offices have accommodated company growth from several employees to a current staff of 14 financial professionals and almost $1 billion in client assets.

As Hardesty Capital looks to the future, we’ve concluded that a larger and more updated space is necessary. In addition to more offices and conference space, our firm requires a building with state-of-the art technical capabilities that ensures our maximum efficiency.

As importantly, many of our clients have expressed a desire to have their investment (more…)

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2014 Q2 | Economy Thaws, Companies Move Abroad

Jim HardestyLet’s take a moment to look at the first half of 2014. Both stocks and bonds moved forward in the first half of the year. The S&P 500 gained 7.12%, and the Dow Jones Industrial Average gained 2.68%. The 10-year Treasury rate fell from 3.0% to 2.6%, resulting in a 2.1% increase in the price of this important benchmark. These results were consistent with a number of mixed signals coming from the economic recovery, which has continued to be on-again and off-again.

This in part is because the country experienced a severe winter, a bitter cold, and many weather-related economic disruptions. The result was that real gross domestic product fell 2.9% in the first quarter, considerably worse than the consensus expectations. We think first half weakness is only temporary and will result in a deferral of demand. Recent strong automobile sales coupled with improving housing demand suggest third quarter GDP could be up 3-4%. Because of the weak first half, the outlook on the balance of the year needs to be reasonably strong to reach our initial 3-4% full-year growth forecast. In order to err on the side of conservatism, our new forecast calls for growth to be in the 2-2.5% range. (more…)

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2014 Q1 | Trade Winds Pick Up, Economies Gain Speed

Jim HardestyThe financial markets struggled in the first quarter of 2014, but despite several challenges, managed to reach new all-time highs and also experienced a period of relatively stable interest rates. The actual results were as follows:

S&P 500 +1.8%

Dow Jones -0.1%.

10-Year Treasury +3%

Russell 2000 +1.1%

These results were all the more surprising against the backdrop of adverse weather conditions in North America, continued problems with the rollout of Obamacare, and the seizure of a large part of Ukraine by a re-energized Russia lead by Vladimir Putin. Finally, there was the mysterious disappearance of Malaysian Airlines flight 370 on the morning of March 8th. In a strange way, the missing airplane brought many nations together, including China, the U.S., the U.K., Australia, and India, in a determined search for the plane. How nice to have so many world powers working towards a common objective, which if successful would represent a cooperative global achievement. (more…)

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2013 Q4 | At Last the Recovery—Maybe?

Jim Hardesty PortraitThe stock market as measured by the S&P 500 recorded very powerful results in 2013, advancing 32% (total return), the best performance since 1997. Other equity indexes advanced strongly, confirming that a sustainable economic recovery has begun. The 10-Year U.S. Treasury Bond rate ended the year at 3%, up significantly from the 1.4% Iow recorded in 2012. The rise in rates suggests a strengthening in credit demands normally associated with an upturn in economic growth. None of this is very comforting to bond holders, who experienced a loss of 3.2% (according to the Bloomberg U.S. Treasury Bond Index) in U.S. Treas­uries in 2013. Financial markets are a leading economic indicator and the strong equity gains of 2013 hopefully are a predictor of better economic times in years ahead. (more…)

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How do you time the market?

jim hardestySeveral times a month I am asked where I think the stock market will be in six months or a year. The question implies that I am some sort of stock market astrologer, and that would be very scary. I just reply “I have no idea.” In the short term, I doubt that anybody has much of an idea where the stock market will go. But over the last 75 years, the market has provided an average total return of 9.4% compounded annually, comprised of 5.4% price appreciation and 4.0% dividend yield.

But the market direction question is really trying to ask is how do you time the market: when do you sell out and when do you buy in? This strategy of market timing is fraught with risk and can be very dangerous. The timing of the market requires two critical decisions: when to get out and, more importantly, when to get back in. The second decision, when to reenter the market, is really the hard part. (more…)

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Will I run out of money in my lifetime?

jim hardestyFor the first time in my life, I am being asked when I plan to retire. It seems like only yesterday, when as a ten or twelve year old, I would sit in church on Sunday mornings thinking I would never finish my education, let alone turn sixty-five, then considered a normal retirement age. Now I am sixty-seven and advising clients on retirement planning.

Sooner or later, almost every retired client of our firm; a young sixty something or the very old; the moderately wealthy or the very rich; the big livers or thrifty old ladies, all ask the same question: “Will I run out of money in my lifetime?” I have come to the conclusion that no matter how wealthy you are, you will know you are old when you think you might run out of money. (more…)

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2013 Q3 | Waiting on Washington: A Nation Adrift

Jim Hardesty PortraitThe United States and the world suffered through a miserable quarter of political and economic disappointments. The Arab Spring turned into an Arab nightmare as Egypt’s President Morsi was ousted in a military coup, leaving the country in a state of civil unrest. Citizens of neighboring Syria, suffering through a seemingly endless civil war, were unbelievably subjected to a ruthless poison gas attack that killed fourteen hundred people, many of them children. A stunned world watched as President Obama’s threatened missile retaliation was averted at the eleventh hour by the almost fictional villain, former KGB Chief and now Russian President Vladmir Putin, who brokered a deal for peace in exchange for the destruction of Syria’s chemical weapons stockpiles. In late September, there was an Al-Qaeda-led massacre in a Kenyan shopping center. Kenya, we believed, is one of the more peaceful nations in Africa. Finally, a deranged man attacked the Naval Shipyard in Washington, resulting in twelve deaths. (more…)

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What kind of investor are you?

jim hardestyNot too long ago someone asked me what kind of an investor I was. I was tempted to make a joke of the question and answer simply, “A good one.” But then I thought of one of my old professors at Columbia Business School, Benjamin Graham, and I realized the depth of the question.

Graham lived from 1894 to 1976, wrote extensively, and was widely accepted as one of the most influential investment minds of all-time. He was credited with educating many investment luminaries including Warren Buffet, former Goldman Sachs partner Leon Cooperman, Mario Gabelli of the Gabelli Asset Management and, of course, me! (more…)

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2013 Q2 | The Return of the Summer Rally

Jim Hardesty PortraitThe results for the second quarter were good. We estimate that the domestic economy, supported by continued gains in housing and solid automobile sales, expanded at a rate of 1.7% in Q2 2013. The current economic expansion, which began in February 2009, is now 52 months old and approaching the average 57 month expansion in the post WWII period.

If we view this recovery in terms of em­ploy­ment, corporate profits, and gross domestic product growth, it is clear employment is the laggard. One possible explanation could be that our economy is becoming more productive, benefitting from investments in the information revolution, which are more wide­spread than previously thought. This development has lowered labor needs. Another explanation could be that corporations were surprised at the suddenness and the magnitude of the fall in the economy in 2008. The recent credit crisis was fueled by the bankruptcy of Lehman Brothers, which resulted in the bankruptcies of General Motors and Chrysler. These events pushed any number of companies to the brink of insolvency. Managements, shocked by the closing of credit markets, became very reluctant to add full-time employees, contributing to the current employment woes. The third factor potentially retarding employment levels is the uncertainty surrounding the implementation of the Affordable Care Act, which impacts 18% of the US economy. Many of the details of the program are unresolved.


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2013 Q1 | It’s the Fed, Stupid

Jim Hardesty Portrait

It’s the Economy, Stupid — Bill Clinton, 1992

It’s the Fed, Stupid — Hardesty Capital Management, 2013

The stock market performed exceptionally well in the first quarter of 2013. In fact, the Dow Jones Industrial Average broke through its 2007 high of 14,400 on March 11 and finished the quarter with a total return of 11.9%. The S&P 500 flirted with its all-time high and closed the quarter at 1,569, just above its former peak of 1,565, and had a total return of 10.6%.

Also notable was the failure of the bond market to keep pace with the stock market, confirming our long-held fears that the bond market was vulnerable to a rise in yields, which occurred in the quarter. The 10-year Treasury yield rose from an all-time low of 1.41% in July 2012 to 2.06% on March 11, only to fall back to 1.86% by March 31. With interest rates at such low levels, even small movements resulted in extraordinary price volatility, both up and down, in bonds.

Since the S&P 500’s closing low of 683 on March 6, 2009, the index has recovered 130% to 1,569. It took the S&P over 4 years to recover to its old highs. Investors have remained fearful of equities long after the 2009 lows were established. As the chart on the next page indicates, large outflows of funds from equity mutual funds continued almost monthly until early 2013. The big gains in equity prices have been accompanied by large increases in earnings. This means that the market is paying the same (or even lower!) price per dollar of earnings. As a result, valuations remain very reasonable (see chart, back page). In addition, many retail stock brokers report strong resistance on the part of small investors to increasing exposure to equities. Perverse as this may sound, the absence of the small investor provides a large reservoir of funds for future equity investment, which in turn will support or even increase equity prices down the road. (more…)

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2012 Q4 | Saved by the Bell—Again

Jim Hardesty PortraitDespite an acrimonious, bordering on uncivilized, debate between the executive and legislative branches of the government, a major tax reform bill was passed and signed into law in the predawn hours of January 2nd. Regardless of when the legislation was signed, it appears our nation has avoided a journey into an economic twilight zone known as the “fiscal cliff.”

The eleventh-hour rescue appears to have temporarily avoided a crisis, but virtually no party to the legislation is satisfied with the outcome. Some would say that the can was again kicked down the road, and major issues remain. Sometime in the first quarter of 2013, perhaps as early as March 1st, additional authorizations will be necessary to increase the Federal debt limit, which created a near-crisis in August of 2011 when it was last addressed. The consequence of that crisis was the loss of the country’s AAA bond rating, and it appears this debt limit problem will be every bit as contentious as that of 18 months ago. Be assured that the hostile environment in Washington associated with economic issues will be with us for quite some time. (more…)

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2012 Q3 | Approaching Crunch Time

Jim Hardesty PortraitEconomically, the doldrums settled in this summer. This is not altogether surprising considering the myriad issues confronting countries all over the world. The European financial crisis, the Fiscal Cliff, and the Presidential election are all weighing on the minds of corporate and government leaders. As we approach crunch time for these major events, rhetoric has increased and economic activity has slowed. During the quarter, U.S. economic activity stumbled along at a growth rate of less than 2%. This frustrating performance resulted in a continuation of high levels of unemployment and a significant number of workers who have ceased looking for work. This subset of discouraged workers, known as “Series U-6,” has now reached 6.6% of the workforce, and when added to the official unemployment rate of 8.1%, results in a level of 14.7%. While U-6 has improved, it is still unacceptably high.

In spite of these pending issues, our economy continues to push ahead, albeit at a slower-than-desired rate. This, however, is much better than many other parts of the world. Cracks appeared in the great Chinese economic wall, yet Asia as a whole maintained reasonable forward momentum. The same cannot be said for Europe. Finance ministers grappled with lingering effects of excessive borrowings that violated many countries’ pledges for responsible fiscal policies that were accepted as a condition of joining the Euro. Although European economic growth proved disappointing, we sense the financial challenges did not worsen during the quarter. (more…)

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2012 Q2 | Uncertainty Provides Opportunity

Jim Hardesty PortraitThe fast start the economy and markets enjoyed in the first quarter of 2012 faltered as the year progressed. Stocks fell sharply from April to May only to recover modestly in June. For the quarter the S&P 500 declined 2.75%, but for the first half of 2012, the S&P 500 advanced 9.49%. The fixed income markets continued to respond to Federal Reserve Chairman Bernanke’s stated goal of stable, low interest rates. The 10-year treasury began the quarter at 2.22% and finished the quarter at 1.67%.

Signs of a possible economic slowdown in the U.S. emerged late in the quarter as employment gains slowed sharply, retail sales ex-autos stalled, and capital spending slowed markedly. In addition, consumer confidence fell for the fourth consecutive month in June and the ISM Purchasing Managers Index fell below the critical level of 50 (see chart), which means manufacturing contracted. Put simply, the U.S. economy has been unable to establish a steady recovery pattern, and nobody seems to have a clear explanation as to why the economy cannot sustain upward momentum. (more…)

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