2nd Quarter 2010 Investment Review

 

July 2, 2010

Dear Clients and Friends:

With the 2nd quarter now completed, we would like to update you on the capital markets and our investment strategy.

 

While the capital markets logged a strong 1st quarter due to optimism about the economic recovery, the 2nd quarter could be described as the polar opposite. Escalating concerns about the viability of the European Union and sovereign bonds cast a shadow over equity market euphoria. Weakening data in terms of US employment and housing also contributed to a rise in negative sentiment. Lastly, fears that governments will implement austerity programs and central banks are beginning to reduce available liquidity led to dramatic swings in the market. The warning shot appeared during the May 6th “Flash Crash” where the Dow Jones Industrial Average declined nearly 1000 points in a matter of minutes. Since then, the markets have exhibited major swings on an almost daily basis. For the year, the Dow Jones Industrial Average has lost 7.7% and the S&P 500 and NASDAQ have dropped nearly 9%*.

 

The two questions that appear to be foremost in investors’ minds are: is the bull market dating from March 2009 coming to an end and is the economic recovery stalling? While the media has featured no shortage of economists and analysts discussing these topics, there seems to be great division and confusion even amongst the experts. As we have discussed in previous updates, we do not believe that the stock market and economy are moving in lockstep. Our view is that the stock market rally has been largely fueled by low interest rates, massive liquidity injections, and investor fears of future inflation. On the other hand, the economy, while improving from the 2008 financial crisis levels, has had a much more subdued revival. We believe that the real economy has derived limited benefits from the loose monetary policy that is now in place. After all, banks and financial institutions have less motivation to lend to consumers and businesses in a depressed business environment when there are potentially better risk/reward outcomes available. For example, banks can purchase US Treasury bonds or even speculate in the stock market via their proprietary trading desks.  For these reasons, we anticipate that the global economy will continue to experience a long, uneven recovery. We expect that it will take several years until the economy is fully functioning again.

 

Interestingly enough, our view of the stock market is not as bearish as the economy. We believe that the fears of government austerity and central bank money tightening are overblown. It may be politically popular to espouse austerity plans and central banks may claim that they are ready to begin clamping down on money supply, but we do not think this is viable. Economic, political and social reality dictates otherwise. The global economy is not convincingly strong enough to stand on it’s own without continued stimulus. As such, we believe that there is a strong likelihood that the current stimulus measures will actually be increased in the near future due to worries about economic strength. If this forecast proves to be correct, this may benefit stocks and commodities.  In the near term, however, it’s possible that negative sentiment will continue to weigh on the markets. While this could cause a major downturn in stocks, we do not believe the risk is as elevated as it was in 2008.

 

 

Our current investment approach is as follows:

 

·         We are invested in Large and Mid Cap US stocks.

 

·         We continue to hold short-duration corporate bonds and municipal bonds. We are actively watching the major municipal markets as we think they may provide an early warning indicator if our investment thesis is incorrect.

 

·         We are bullish on gold, silver, and mining shares.

 

·         In some portfolios, we hold currency positions in Australian and Canadian dollars.

 

·         While we continue to use a tactical asset allocation approach, we are not holding short positions currently.

 

While not all of this may apply to your investment portfolio, this provides a general overview of our present investment strategy.

 

We thank you for your continued confidence and support. Should you wish to discuss any of the above in greater detail, please do not hesitate to call me at (212) 302-7361.

 

Cordially,

 

 

 

Matt Blank, CFP®

 

 

 

 

 

 

*All index returns are as of 6/30/10 Morningstar data. Please note that investment comments are intended to be informative and general in nature, do not constitute the offering of any security, may not be predictive of future results, and have not been tailored to the specific investment objectives of any one individual.