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It was about five years ago that the current equities bull market began, although you would have had to search far and wide to find any investor, professional or retail, who properly called that bottom at that time.  At Trusted Financial, suspecting we were in a bottoming pattern, we were continuing our program of selective buying of stocks and bonds at what were bargain prices. Please take a few minutes to read the words I wrote for our Trusted Advisor Client Newsletter - April, 2009.

For Quarter ending March 31 2014, client accounts saw a modest gain of 2% to 3%. This topped most domestic stock indices. New price highs were experienced in cyclical holdings and in non-cyclicals such as Utilities. In other words, it was a pretty satisfying quarter.

Fixed Income Strategy
I share a widely held belief that we are in the trough of interest rates and that the next move will be higher. However, this change appears likely to manifest itself only gradually. I’m not one who believes that the massive money creation by monetary authorities across the planet will lead to runaway inflation or to interest rates rocketing upward to contain it. That was the scenario between 1972 and 1981, but that was forty years ago and something has changed: productivity. We are still in the early-to-mid innings of an electronic (i.e. silicon based) productivity revolution. Fewer employees can accomplish more tasks at lower costs than at any time in the past fifty years and this trend continues apace. Labor costs, on a unit of production basis are falling. Further, the North American energy bonanza will, for decades, dampen the cost of energy, a key input to inflation.

As we approach the half-way point for the current quarter (was New Year’s Day that long ago?), I wanted to briefly summarize financial market news and our response thereto. Hope was surging along with the market as the books were closed on 2013. As indicated at our client Holiday Luncheon in December and in private conversations with some clients, value investors such as ourselves have been uncomfortable with the dramatic lift off in share prices that manifested itself so widely during the last three months of 2013....

Finally, after thirteen years, the broad U.S. stock indices achieved inflation-adjusted records in 2013. Responsible investors with a functioning memory were unlikely to have participated in the 30% rise of U.S. Equities, because no one in their right mind committed their entire liquid net worth to such a volatile vehicle. For those of us who had a substantial amount in stocks, along with other vehicles, the overall results have been decent, pretty much in line with Trusted Financial’s long-term rate of return.

 The truth about stock ownership is that it has been only a marginally productive endeavor over the past 13 years, once performance is adjusted down for the effects of lost buying power (aka “inflation.”) ...

We think this article posted in the Wall Street Journal will most definitely be of interest for our clients and those thinking about hiring us. 

“Thinking About Hiring an RIA?  Here are Ten Things You Should Know“

As the third quarter came to a close, eyes were on Washington as the House of Representatives escalated what has been an annual brawl over the budget into a shutdown of mostly non-essential functions of the Federal Government. Congress has been rehearsing for this Kabuki dance since the last government shutdown in the mid ’90’s. They have made sure to insulate themselves from the most powerful constituencies by exempting Social Security, Medicare, Federal Aviation Administration and National Security related entities from the “shut down.” This keeps most voters from flooding Congress with hate mail for a while, unless they happen to have planned a national park vacation. If predictions that the stand off will continue for weeks is correct, then the buffalo in Yellowstone will be free to roam without those annoying cameras clicking, at least for a while.

Should you be worried? Bullish equity markets are said to "climb a wall of worry."  The media can be reliably counted upon to magnify the crisis du jour, but economic fundamentals trumps temporary crisis in the long-term. I believe there is a good chance that the shutdown and the debt ceiling debate to come will cause a market sell-off. Since Trusted Financial Advisors invests based on long term fundamentals, a healthy sell off will likely be an opportunity to pick up some good merchandise for client portfolios.

The positive fundamentals driving the US equity market at this time are:

Bond and stock markets are having a summer correction, focused on interest sensitive securities. This has occurred against a backdrop of mixed economic news not just in the United States but also in Europe and China. The US economy crawls forward, the Chinese economy is expanding at a slower rate than in recent years. Europe appears to be at the nadir of its recessionary contraction, but there is little prospect of vigorous economic expansion on the continent, which is constrained by stiffening banking regulation and a soggy real estate market. The basket case nations of Europe continue to force the EU central bank to expand its balance sheet, but it does so at a far slower pace than we have seen under the Bernanke Fed in the United States, suggesting prolonged doldrums across the Pond. European nations suffer from greater unemployment than the US because the unemployed are an entitled class in most nations, and laws that give labor extraordinary power discourage new hiring and new enterprise. A spokesperson for the "League of Unemployed" has a solution: cut the official work week from 36 hours to 32 hours so more people will have to be employed. To this group, Karl Marx had an even better solution, except that it failed the last time it was tested, didn’t it?

Since the USA‘s expansion out of the Great Recession may not be gaining speed, investors are, it seems, retreating from the frantic buying that characterized the first quarter of 2013. The damage has been focused on those instruments that attract income investors: bonds, REIT’s and MLP’s. This is because interest rates have been ratcheting upward since the Federal Reserve Chairman suggested it might back off on the extraordinary level of bond purchases known as “quantitative easing” (QE III) that it began about 10 months ago.

As a strong quarter progressed, I became increasingly uncomfortable with the euphoria that seemed to be infecting investors, especially those who like interest sensitive holdings. Sure enough, the air was let out of that balloon with Fed Chairman Bernanke's comments in mid-May. He indicated that the Fed might let up on the credit creation gas pedal sooner than later, because the US economy appears to have gained a growth momentum that no longer requires dirt cheap credit to nudge it along. Horrors! Good news like this was anathema to many bond market participants, who have become addicted to ridiculously cheap credit. Panic ensued.

Along with bonds of all classes, interest sensitive sectors like MLP's, REITs and utilities took a hit, many falling 15% from recent highs. Because our clients are well diversified, and we had already raised cash levels, shrinkage was confined to low single digits. 

Our policy for the past year has been to not replace existing bond positions when they mature or (more commonly) are "called" in by the issuers. I've bemoaned these early bond redemptions in previous newsletters because our clients' bonds are generally paying generous income, something nearly impossible to find today. Nearly all bonds we own are institutional grade, purchased between 2007 and 2010 when nervous investors avoided this asset class in the doleful days of the Great Recession. Most of the cash generated from bond redemptions or bond fund sales have been left in cash, as few bargain stocks were available, in my judgment. 

June 17 Flash:

Bernanke about to announce an end to extraordinary bond purchases? Fear not, the economy is gaining moment, it seems, see our comments from about ten days ago below: 

June 7, 2013

Things are so dull in this slowly expanding US economy that financial media have taken to treating the release of a […]

There is little doubt that the US economy is on the mend. Commentators who continue to refer to “the ongoing recession” or “our lousy economy,” (and there seem to be many of them), are strangely out of touch. Economic recovery so far has been of primary benefit to active investors (bonds, stocks, real estate) rather […]

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