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3rd Quarter 2010
"Reality is nothing but a collective hunch." Lily Tomlin
Economy: A Summertime Cooling. The heat of summer has brought with it a cooling in the economic data. GDP growth in the first quarter has now been revised down to 2.7%. While the unemployment rate did fall in June, from 9.7% to 9.5%, it was widely seen as part of a bad overall jobs report. The labor force shrunk as a large number of people simply gave up the job search. The employment-to-population ratio fell to 58.5%, which is close to the 25-year low of 58.2% reached last December. Some commentators are getting spooked and throwing around terms like “double dip,” or, in the case of the New York Times’ Paul Krugman, even the D-word (Depression). Others have raised the possibility of a lost decade along the lines of Japan in the 1990’s.
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2nd Quarter 2010
"When you come to a fork in the road, take it" Yogi Berra
Overview: A Look Down the Road. One quarter into 2010, we can already see plenty of “forks” awaiting us in the investing road ahead. For instance, China may choose to let its currency rise against the dollar, or continue devaluing it to help its own exporters. Each alternative could lead us into a very different environment. Yogi Berra’s advice notwithstanding, the big question for us as investors is not which fork we will choose to take. That is out of our control. The big question for us is how to best prepare ourselves and our clients for the myriad of possibilities that are coming our way. To help answer that question, in this quarter’s Commentary we will take a look at some different upcoming forks in the road. We will consider the places where each fork might lead, and evaluate how to best prepare ourselves for the trip.
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1st Quarter 2010
"Don’t knock the weather. If it didn't change once in a while, nine out of ten people couldn't start a conversation." American humorist Kin Hubbard (1868 - 1930)
Overview: A historic shift? It’s interesting to think that while so much of the U.S. is in the grip of a cold winter, places south of the equator like Brazil and Australia are in the middle of summer. That’s the balance of the global climate. The global economy has a certain balance to it as well. And recently that balance seems to be shifting. For years, high rates of consumption spending in the U.S. have been balanced out by high rates of savings in China. In effect, millions of Chinese have been working so we could consume. Both sides received benefits from the exchange. Americans got to buy cars, vacations, home electronics and a myriad of other goods and services we otherwise would not have been able to afford. China got a fertile market to send her products to, which grew her economy. China also built up huge savings, which represent claims on future economic output.
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4th Quarter 2009
"To everything there is a season, and a time to every purpose under heaven." Ecclesiastes 3:1
Recently I have been thinking about how many cycles there are in life. Day follows night, which follows day. Fall follows summer, which follows spring, which follows winter, which follows fall. Your children grow up and go off to college, like you once did. The thing about cycles is that they take you, in some sense, back to where you started. The economy has its own cycle – the business cycle. Sometimes (the past couple of years, for instance) it takes us on a wild ride. And it is a hard ride to predict. Nonetheless, there seems to be broad agreement about where the business cycle now stands. The recession has ended, and recovery begun.
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3rd Quarter 2009
"Smile, breathe, and go slowly." - Thich Nhat Hanh.
It’s an age-old question: What does the situation call for, a breathless plunge forward into action, or a pause for contemplation and analysis? After a strong spring rally in stocks, the market seems to have decided upon the latter course. For the past month, the major stock indices have sidled along horizontally, as if trying to decide what their next move will be.
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2nd Quarter 2009
"I’m no model lady. A model’s just an imitation of the real thing." - Mae West.
Is this Rally THE Rally? One of the most interesting things about the Internet is how it has made so much of our own past readily accessible. For instance, while pondering the March rally in equities, I found myself trying to figure out if it was the beginning of a sustained climb, or just a false alarm that will pay its gains back in April.
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1st Quarter 2009
"In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price." - Warren Buffett.
Investment markets are strange beasts. When prices soar to unbelievable heights, people clamor to buy whatever they can wrap their fists around. When prices fall into fire sale territory, the aisles are as empty as a ghost town. I wouldn’t mind owning a retail store that worked like that!
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4th Quarter 2008
"An investment in knowledge always pays the best interest" - Benjamin Franklin.
Leave it to old Ben Franklin to have the perfect advice for troubled times like these. In a crisis situation, those who keep their heads on straight are the ones who will prosper. The best way to keep your head on straight is to fill it with a sound understanding of what is going on around you. To that end, we are focusing this edition of the quarterly commentary on the problems gripping the world’s financial system. While we don’t have the space for a dissertation-length analysis, we hope to provide the kind of bird’s eye view with which an investor can weather the storm and be positioned for success in the clear skies that will eventually return.
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3rd Quarter 2008
"Courage! What makes a king out of a slave? Courage! What makes the flag on the mast to wave? Courage! What makes the elephant charge his tusk in the misty mist, or the dusky dusk? What makes the muskrat guard his musk? Courage! What makes the sphinx the seventh wonder? Courage! What makes the dawn come up like thunder? Courage! What makes the Hottentot so hot? What puts the "ape" in apricot? What have they got that I ain't got? Courage!" - the Cowardly Lion in the Wizard of Oz.
Like the lion in The Wizard of Oz, the current bear market could use a shot of courage in order to become the bull that we all love. In the meantime, it will take brains to see past the current circumstances to the rainbow that lies beyond. Those who do will realize that a bear market is filled with long-term opportunities, but it will take nerve to act on them.
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2nd Quarter 2008
"I saw the light, I saw the light. No more darkness, no more night" - Hank Williams.
We have watched the first crisis of Bernanke’s tenure play out in recent months as credit markets have become increasingly dysfunctional in the wake of the sub-prime mortgage crisis. The dysfunction reached a fevered pitch in mid-March as Bear Stearns, one of the nation’s largest investment houses, teetered on the edge of bankruptcy. Worried clients and creditors were pulling cash from the firm, creating an old fashioned, self-reinforcing “run on the bank”.
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1st Quarter 2008
"Our problem is not to eliminate fear, but rather to harness fear and master it." - Rev. Martin Luther King.
I am thinking about some of the great leaders of the twentieth century, like Dr. King, who provides our opening quote, and Franklin D. Roosevelt, who said that “the only thing we have to fear is fear itself.” The impact of these men was not merely a matter of the policies they promoted, but of how they inspired people. Now we are in a time when people could use some inspiration on the economic front. Since we last spoke, it has become clearer that the economy is in the midst of one of its periodic “landings”, and the question on everyone’s mind is whether it will be hard or soft.
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4th Quarter 2007
"The further backward you can look, the farther forward you are likely to see." - Winston Churchill.
The U.S. economy continues to offer up a mixed bag of both positive and negative data to confuse the markets. Nonetheless, Fed Chairman Ben Bernanke proved that he is serious about taking a stand against the threat to the macro-economy posed by the ongoing sub-prime credit fallout. At an October 31 meeting the Federal Open Market Committee (FOMC) lowered the fed funds rate, despite unexpectedly strong third quarter GDP growth of 3.9%. This is good news for investors. It shows that Dr. Bernanke is not overly stingy with rate cuts in response to financial market problems, even in the face of robust GDP numbers.
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3rd Quarter 2007
"The most treasured asset in investment management is a steady hand at the tiller." - Robert Arnott.
You may recall from the last newsletter that a monster with two ugly heads – weak economic growth and rising inflation – appeared in the first quarter. Fortunately, this menace has made like Elvis and left the building. In the second quarter inflation moderated and the U.S. economy posted a healthy 3.4 percent growth rate. My unofficial tally is that most economists are forecasting growth rates of 2-3 percent for the rest of the year, a modest but sustainable pace.
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2nd Quarter 2007
"Human beings, who are almost unique in having the ability to learn from the experiences of others, are also remarkable for their apparent disinclination to do so." - Douglas Adams
Recent economic data is giving the Fed plenty to think about ahead of its May 9 interest-rate-setting meeting. On one hand, the economy is showing some signs of weakness. Housing starts are down 23 percent from a year ago. Sales of existing homes fell 8.4 percent in March - the steepest one-month slide since 1989. Housing prices are also beating a historic retreat. February’s 1.5 percent drop was the largest in almost 15 years...
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1st Quarter 2007
"Ninety percent of what passes for brilliance or incompetence in investing is the ebb and flow of investment style - growth, value, small, foreign." - Jeremy Grantham
A well designed asset allocation strategy is the best way for you to achieve your long-term goals. Inherent in the whole concept of asset allocation is the idea that different assets, such as stocks, bonds, real estate or commodities, will perform differently. Yet, combined together in the right proportions, these assets enhance the long-term predictability of the risk and returns your portfolio is likely to experience. In deciding which asset classes to include in your portfolio and in what proportions, it is important to consider the risk of each component, its expected return and its correlation or movement in relationship to the other assets.
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4th Quarter 2006
"(A good portfolio) is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies." - Harry Markowitz
The U.S. stock market has made a nice rebound from the summer lows, boldly embracing the infamously gloomy months of September and October - as if to proclaim they have lost their authority over the markets. The question now is, "Will the stock market continue to rally from these levels, temporarily succumb to profit taking before resuming its uptrend or begin a decline that will mark the recent highs as the apex of the year?" This is a difficult question to answer without examining both the factors that have allowed the market to rise to these levels and those that may carry the market even higher.
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3rd Quarter 2006
"We are not retreating - we are advancing in another direction." - General Douglas MacArthur
In my previous newsletter, I described the investment climate as "Partly Sunny with Increasing Cloudiness". While I do not generally speak about the investment markets in meteorological terms, my forecast actually turned out to be quite accurate. Investors and policymakers have been struggling for the last few weeks with economic data suggesting growth may be slowing, while inflation is accelerating – a troublesome combination. If this is not challenging enough for the markets, new changes in the geopolitical landscape are certainly clouding the picture further. The recent outbreak of war between Israel and the Hezbollah in Lebanon and worries about a wider involvement by Iran and Syria have been added to pre-existing concerns surrounding Iran and North Korea’s nuclear desires. Furthermore, recent successful terrorist bombings in India and a failed attempt in Canada remind us that terrorism is alive and well. So, where does that leave the markets?
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2nd Quarter 2006
"The trouble with weather forecasting is that it’s right too often for us to ignore it and wrong too often for us to rely on it." - Patrick Young
As I reflect on some of the aspects of weather forecasting that were especially intriguing to me, I realize in many ways I am doing the same types of things today. Instead of forecasting the weather, I gather the various economic forecasts of some of the best economists in the country along with other market specific data and then try to deduce the likely impact to your portfolio - making changes when necessary. Just like forecasting the weather, there are times when strong crosswinds make the predicting job much more difficult.
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1st Quarter 2006
"The trouble with weather forecasting is that it’s right too often for us to ignore it and wrong too often for us to rely on it." - Patrick Young
Somewhere in the heart of the English countryside, Lucy Pevensie entered the enchanted world of Narnia through a magical wardrobe. You see, Lucy, the youngest of four children, had come across the large piece of furniture as she explored the house in which she was staying. She peered curiously into the wardrobe to observe its contents, but was surprised to see the glow of a dim light coming somewhere from deep within the clothes that resided there. As she followed the light, the clothes gradually turned into trees and her surroundings became a whole new world. The light she had followed turned out to be an ordinary light post. However, the world of Narnia turned out to be anything but ordinary. This magical land she found, complete with a great lion and a wicked White Witch, was full of suspense and excitement and ultimately much deeper meaning.
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4th Quarter 2005
The last few weeks have been difficult for both stocks and bonds—you might say they have been a little spooked. Rising energy prices and tight refining capacity, as exposed by hurricanes Rita and Katrina, have intensified fears that the ensuing months could bring accelerating core inflation. Meanwhile, the Fed has continued to push short-term interest rates higher toward the obscure ‘neutral’ rate, described as the level of interest rates that are neither accommodative nor restrictive. All told, investors seem to be waiting for more clarity regarding both inflation and the Fed’s path with interest rates before they commit new funds to the markets.
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3rd Quarter 2005
As we advance beyond mid-year, stocks are struggling to stay positive. This is not surprising considering the major headwinds deterring their progress. Most notably, oil prices have risen more than 40% over the last year. During the same period, the Fed has hiked interest rates more than 9 times. And if the war in Iraq were not enough, geopolitical concerns have become elevated once again as the London subway terrorist bombings of July 7th and July 21st have served to remind investors of the ease with which terrorist events can occur. Finally, the ongoing boom in housing prices taking place in numerous cities across the country is raising suspicions by many people that a real estate bubble is developing and may eventually burst. Considering all these factors, it is actually quite impressive stocks have held their own.
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2nd Quarter 2005
The United States of America has a glorious long-term history of prosperity as a result of the grace of God and the hard work of freedom loving Americans everywhere who have continually strived to innovate and improve their lot in life. It is principally for these reasons that long-term investing in America has been so rewarding. The path to prosperity has not always been a straight one, rather a winding road as periodic cycles of recession and depression have impeded economic progress from time-to-time. These cycles of growth and contraction are referred to as the business cycle by economists.
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1st Quarter 2005
As January drew to a close, Iraqis embraced democracy in large numbers. In spite of strong threats of violence and a string of suicide bombings, their purple-ink-stained fingers testified to their strong desire for freedom and America's undying support of democracy. Completion of the elections was just a first step, but a big step in terms of the pride and hope many Iraqis now feel. The endeavor also attracted strong interest and curiosity from the rest of the Middle East. Let's hope and pray Iraqis are successful in the long run as they move forward in their pursuit of a free and democratic country. As a nation, we are all proud of the sacrifices made by both American and coalition forces in making this possible.
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