Letter - November 2012





Our Approach
Our People
Key Facts

View Account
Wire Funds



Contact Us



As many of you may have experienced, Hurricane Sandy swept through New York, New Jersey and Connecticut last week leaving death, debris and damage. What made the storm distinctive was the widespread flooding resulting from a record storm surge. Many waterside villages, towns and cities were drowned in the surge. In one case on Long Island, 110 houses burned to the ground as gas leaks caught fire even as the area flooded. Incredibly there were no injuries.

Because of the size of the storm, cleanup is going very slowly. In my small village, hundreds of century old trees toppled on power lines, houses and roads. The Long Island Power Authority reported that during the height of the storm 90% of its 1.1 million customers lost power. Now a week later, 400,000 customers remain without heat or electricity. And it's starting to get cold.

Since 1823, there have been 19 deadly hurricanes to hit the New York City area. So, global warming or not, it is likely there will be additional storms in the future. This raises the question of why people build or rebuild in low lying areas that will flood out again, perhaps in the near future? One answer is that everyone loves the beach. Another one is that the federal government provides subsidized flood insurance financed by taxes to the benefit of coastal dwellers living in harm's way but not to those living safely inland. Perhaps if flood insurance were properly priced relative to the risks involved and mandated in flood prone areas, those in search of waterside views might think twice before building close to the water. That would save a lot of money for the taxpayer, reduce damage and, not incidentally, save a lot of lives.

While Sandy swept the East Coast, there has been a hurricane sweeping the nation. No flood risk but lots of super-charged hot air blowing in the run-up to the election. Everyone knows it's a close race. By the time you receive this letter, we should have a winner. And that winner has a very different view than his opponent concerning the role of government in American's lives.

Having said that, we think that the immediate impact of whoever wins has been overstated. The Constitution created the concept of checks and balances to limit the powers of the three branches of government. As a result, the new president will have to negotiate with Congress to advance his agenda. Mr. Romney promises to appeal ObamaCare but he canít do that without the consent of Congress. There will have to be compromise to meet the well-known challenges concerning the economy, deficits and future spending. And since the polls show the race to be virtually tied, any new president will not be able to claim a broad mandate to cram through his agenda. Consequently, the next president is unlikely to have an immediate impact on the economy. Unemployment will not magically drop. Growth will not immediately surge nor will the United States earn back its AAA credit rating overnight.

If your primary concern as a voter is your investments, we believe Mr. Romney in the intermediate term is best for business, the economy and the stock market. In contrast to Mr. Obama, he understands business and the importance of the right incentives to encourage investment and growth. He is likely to forge strong ties to businessmen who have been vilified under Mr. Obama.

As for the stock market, a Romney victory may elicit a short term rally but we think it will not last. After a nice rally, the market may have gotten ahead of itself. In the third quarter, corporate revenues for many companies showed year-on-year declines. More of the same is in store for the fourth quarter and perhaps into 2013. Slowing overseas growth has now become a drag where it had formally been an important driver of growth. Concerns are that margins and profits will follow revenues down. Furthermore, we remain concerned that Mr. Romney will not be up to tackling the large structural problems that face us down the road. There is only so much a president can do. No easy fixes are apparent for the soaring national debt, record budget deficits and entitlement promises made but impossible to keep. It is a situation that probably even Bill Clinton would not be able to handle.

Indeed, we may muddle through as in the past, or we may be in for a mother-of-all-financial-hurricanes in years yet to come. Stay tuned to P.R. Herzig & Co., your weather channel.

Tom Herzig


Please read our important notice about these letters and the securities they mention.