Wednesday, August 3, 2011

The conditions for a reversal -- higher interest rates and lower gold prices -- seem to be emerging now.

Oil is now an economic tailwind and possibly an important one.

Its decline is particularly significant from a timing standpoint as we move ever closer to the back-to-school retail season later this month.

The same applies to the automobile business, which could surprise to the upside in the months ahead, reflecting not only lower oil prices but substantially lower interest rates.

The risk/reward profile of the life insurance names has probably never been as attractive.

Large earnings beats, good top-line sales growth, proactive and active share buybacks (that are accretive) and low valuations (7x 2012 EPS forecasts and deep discounts to stated book values) are the ingredients for material group outperformance.

Run, don't walk, to read Bill Gross's latest monthly commentary at Pimco, "Kings of the Wild Frontier."

Gross illustrates the solution to our current fiscal imbalances with four talking points.

It is said that confidence is contagious and so is the lack of confidence. And these days, this statement applies directly to our Representatives' rancor and overall behavior over the past month in Washington D.C.

A domestic economic recovery on a slow trajectory path is exposed to policy mistakes and external shocks (e.g., geopolitical, oil spike, etc.). It is now clear that confidence has been sufficiently eroded, in part, by the Washington circus -- and this has, in part, served to undermine growth and has jeopardized our equity markets.

These need to get done:

1. Establish term limits for all our representatives.

2. Limit government spending. Set a specific limitation on the annual gains in spending to be less than the increase in consumer price index.

3. Develop a comprehensive jobs plan.

4. Fix housing. Over 15 million homeowners are underwater with their mortgages, the shadow inventory of unsold homes is a drag on a housing recovery, and we must find a way to find a way to reemploy over 2 million former housing-related workers. We need a Marshall Plan for housing. I would suggest that the Obama administration reach out to the two most knowledgeable and smartest guys in the residential real estate markets, Eli Broad and Bob Toll. I would have them all meet in a locked room with Fed Chairman Ben Bernanke, Treasury Secretary Geithner and President Obama (and his economic team).

5. Mean test entitlements, freeze entitlement payouts and gradually increase the social security retirement age to 70 years old.

6. Build infrastructure. Set up an infrastructure bank, and place the money saved on defense into a massive build-out and improvement of the U.S. infrastructure base.

7. Create energy self-sufficiency. Develop a comprehensive plan designed to rapidly develop all of our energy resources.