Smaller Government Larger Gains

"But when that debate prevents us from carrying out even the most basic functions of our democracy- when our differences shut down government or threaten the full faith and credit of the United States- then we are not doing right by the American people."

President Obama
State of the Union 2014

There wasn't much excitement in President Obama's State of the Union address, but there were plenty of things about which to be worried, including the notion that frustration with the process and having to engage in debate is too much of a hassle, so it's time to usurp the intent of the Constitution and go with executive orders.

We are reminded that awful things happen to America, like a government shutdown, and not paying our creditors by debating them. I have a serious issue with the notion that the government shutdown was such a bad thing.

Sure, there were parts that should have been avoided, and Republicans actually tried to make it happen by passing several bills in the house for things like veterans' pay and opening national parks, but any entity with 800,000 non-essential workers should be pared down for its own survival...in this case our survival.

The partial shutdown helped the economy, just as sequestration has dramatically forced down the deficit and made room for capital to find its way into the private sector.

The partial government shutdown that began in the middle of the third quarter didn't stop that GDP report from being one of the best of the entire Obama administration, and the preliminary GDP report for the fourth quarter saw very positive signs.

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GDP 4^th and 3^rd quarter 2013:

Consumption 3.3% from 2.0% (best in three years)
Non-residential fixed investment 3.8% from 4.8%

• Structure -1.2%
• Equipment 6.9

Residential fixed investment -9.8% from 10.3%
Federal government spending -12.6% from -1.5%

• Defense -14.0%
• Non-Defense -10.3%

Savings rate 4.3% from 4.9%:

While it's true that the nation has to grow faster than 3.2% per quarter, it's a feat many would have said is impossible with the gargantuan increase in taxes and cuts in spending by the federal government. If altering the equation with making tax cuts, and with adding even more spending cuts, a magnificent growth, reminiscent of past recoveries could be sparked.

Be that as it may, evidence continues to mount that less government is a good thing for all Americans.

United States Picks up the Baton

The currency crisis in emerging markets parallels the slowing growth of US products in those nations. It's not something I'm worried about long- term, even though it has been a central theme of our investing thesis. The good news is American demand is picking up just in time to take up the slack. This is mostly a result of pent-up demand long unstated, and the slowly improving consumer confidence. Still, people are spending mostly what they earn and dipping into savings (see GDP number above), but even that may be changing.

What can we glean from our domestic demand and the US economy?

Harley Davidson (HOG) had an amazing year selling motorcycles around the world, but there were seismic shifts in the last quarter of the year, where Asia-Pacific and Latin America slipped, while Europe and the United States came on strong.

For the longest time I had to explain to people how Whirlpool (WHR) could be a sizzling stock, even as the United States was mired in the aftermath of the housing meltdown. It was all about the rest of the world, especially Latin America coveting and purchasing American washers and dryers.

Visa (V) saw an interesting flip-flop with credit card use popping and outpacing debit in America, but seeing the exact opposite internationally. In the U.S. credit card volume climbed 9.2% (this warms Bernanke's heart), while debit card volume surged 12.3% outside the United States.

It's becoming clearer that the United States is coming on, and the pent- up demand in Europe could make it the positive wildcard factor in the global economy in 2014.

Investing For Growth

At the beginning of last year President Obama chastised corporate America for sitting on so much cash, triggering a string of dividend hikes and share buybacks. I said coming into the year, the best sign of confidence in America would be major acquisitions and increases in capital spending. What I'm seeing from companies that move goods across the nation, and which are perhaps the best proxies for our economy, is very encouraging. Joining rails that reported higher capex plans last week, Arkansas Best offered capex guidance that speaks volumes about demand in 2014.
ABFS will quadruple capex spending this year from last year (see sidebar) to $100 million. This is huge and much more significant than either buybacks or dividend hikes.
It's important that emerging markets get past their challenges sooner, rather than later, but the US economy has been the most worrisome part of the rally, along with our fiscal and monetary policy. If I'm reading the tea leaves correctly, then we should see 3.5% GDP growth this year...not the greatest in context of past recoveries, but enough to generate more job growth and high stock prices.

Friday's session was the first time I saw serious buyers step up in more than a week, which was odd going into a weekend and so close to pivotal support points. The finish was sloppy, but salvaged what could have been even a lot worse.

This week we get the jobs report. I think the number has to be good, and beat consensus as the Fed has already made its play, and a reversal would spook investors even more.