Commentary for the week ending 05/01/2021

Well, another week, and another trillion dollars or so of spending proposals by the Democrats.  Actually, Biden is proposing a total of about 6 trillion dollars in federal spending.  In the meantime, the economy is improving on its own but Biden, of course, like every President before him, is taking credit for it.  Presidents actually have very little to do with the macro economy, it is the Fed and Congress which has the greatest impact on the economy.  As for economic impact of the spending plans, there are already signs of supply pushes on inflation – commodity prices in cooper, gold, oil, etc. are rising.   This will eventually lead to increased consumer prices and wage increases (i.e., inflation).  The Fed seems to think that they will be able to control it once inflation goes above their target rate of 2% for an “extended period” (whatever that means in Fed speak).  I fear that they will not be able to so, and they will be forced to “slam on the brakes” with huge increases in the fed fund rate.  So be prepared – I think that the ten year note will be at least 2% by the end of this year, and very much higher by the end of 2022.  


A few more comments about Biden and the Democratic agenda.  In Biden’s speech, he said “Wall Street didn’t build America” (I’m paraphrasing).  He claimed only the unions and their workers did.  Well, Mr. President, where did the companies get the money to pay workers to “build America”?  It came from investors in the stocks of those companies you seem to hate so much!  His proposal to raise the capital gains tax to 43% is frankly insane – economists calculate the maximum revenue at 28%.  If this proposal goes thru, it will lead to massive sales in stocks and properties in the year before it is effective, and then a dearth of buying afterward.  In addition, Biden continually claims “no one making under $400,000 will see their taxes go up” – but the Democrats are unclear on whether “no one” means a household or a single person.  I will wager that that it means individuals – and I see the tax increase touching more Americans. Finally, I hate it when liberal economists like Robert Reich claim that the 90% rates of the fifties were fine because the economy was doing so great.  He never mentions that essentially no one paid 90% because of deductions and more importantly the US had virtually no competition because of the destruction of the rest of the world’s economy from WWII!  It is a shame that the US squandered those advantages by the government wasting money on the Vietnam War and businesses not investing in new plant and equipment as Germany and Japan were rebuilding theirs.  


As for the stocks in the Growth Fund, I am pleased that market recognized the excellent performance of Alphabet and Facebook.  I believe that Alphabet is still undervalued, particularly because of the excellent contribution of You Tube.  I see Alphabet doubling by the end of next year, so stay tuned.  Facebook has room to grow and as I mentioned previously, the intrinsic value of the stock is about $387.  By the way, Barron’s agreed with me several weeks ago.  So here is a program recommendation for you:  Barron’s Roundtable on Fox Business.  Don’t worry, the show is non political, and is an entertaining and informative show on business with a roundtable of Barron’s contributors and expert guests.  It airs on Friday nights at 10:30, but it is repeated over the weekend, and, of course, you can DVR it.  Highly recommended viewing.  


On the stocks in the Income Fund, please don’t worry about Merck.  Many of the drugs in Merck’s portfolio require a personal visit to the doctor, and with COVID, many people were scared away from doctor visits.  With COVID getting under control, I see prescriptions for Merck’s drug increasing this year, so stayed invested and collect your dividends.  Another drug stock that you may want to consider is one in my personal portfolio – Abbvie (ABBV).  Abbvie has Humira (an expensive drug needed for Chron’s Disease, among other autoimmune disease).  Humira accounts for about 43% of sales.  But not to worry, they recently acquired Allergan to help diversify sales.  ABBV pays a healthy dividend of about 4.6%, so it is attractive for income investors.  And it out performed the rest of the drug industry, going up by 3.5% this year as compared to the industry average of 1.7%.  The drug industry, in general, as noted by these low performance figures, has underperformed the rest of the market.  But I see opportunities for growth as well as income with most stocks in this sector, so I would recommend overweighting this sector in your portfolio. 


So, that’s about all for now, from the desk of Dan Miley.    Happy investing and Happy Derby Day to my friends in Louisville!  

2 thoughts on “Commentary for the week ending 05/01/2021”

  1. The “street” must have read my commentary on Abbvie today: from Reuters: ** Abbvie Inc: up 2.8%
    Street View: Abbvie’s diversity will help overcome Humira’s loss of exclusivity

  2. “Don’t let anybody tell you that it’s corporations and businesses that create jobs” said Hillary Clinton. It is that politically seasonal disdain for private enterprise that will crush this economic growth. There was no reason for a stimulus of this size. Dan is right.

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