Current Commentary

The view from Orange County California, one of the highest net worth counties in the United States...

When judged by indexes, it has been a grand year for the stock market. Bonds have done their part too. Our Balanced/Value portfolios have generally seen a gain of about 8% year to date. This is below the stock indexes, as is normal for our “Balanced” style during a bull market.  We shine most when the Applesauce hits the fan, so you will see from the figures found at the end of this article that over the past five years, which encompass the Great Recession Bear Market, our clients enjoyed annual returns of over twice the rate experienced by stock index investors. Speaking of Applesauce (and Google) these were principal drivers of stock market indexes in the quarter. If you were not heavily invested in them, you “underperformed”.

A quarter in which global financial indicators began to turn southward ended with a roaring finish on June 29, 2012.  As with last year a leading cause for equity market concern was the confused and deteriorating state of balance sheets in Europe. Leading banks in the southern tier as well as governments appeared close to collapse in a scenario not unlike that which dominated the U.S. financial industry from 2007 until 2009. I'm currently reading Andrew Ross Sorkin's Too Big to Fail, a reminder of how very human the people are making decisions that will affect the well being of billions of people across the globe.  In the case of the USA, then Treasury Secretary Hank Paulson and his brilliant team of dedicated public servants shine through for knocking heads together to avoid a domino effect as Lehman Brothers went through bankruptcy.  Fed Chairman Ben Bernanke and then New York Fed President Timothy Geithner also did yeoman work. 

In the nearly three weeks since our last blog entry, equities markets have tilted toward the more negative outcome we discussed as a possibility.  In response, we've raised our allocation to cash as nearly all the signals have retreated. The one positive trending major economy on the globe, the USA, seems to be faltering and recent stats confirm a small contraction in output of goods and services and importantly a slowdown in hiring.  Below are some selected quotes and opinions from some of our favorite observers of the big picture.  First, Alan Ableson, who I've followed since I was a neophyte investor at age 24 (I'm 63 today..my goodness how old is Alan?), scoffs at the annual cheerleading that emanates from the home marketing industry. Then, thoughtful Martin Wolfe, columnist for the Financial Times, highlights the abyss into which Europe seems to be falling. Finally, Greg Valliere a Washington economic/politics  observer talks about a surprising improvement ini Mitt Romney's prospects for the presidency this November (note, he predicted Hillary Clinton would be the Democratic candidate in 2008).

Clients can be assured I continue to be watching things closely and that positioning is defensive but not cowardly! 

Déjà vu (French for "Already seen")

In both 2010 and 2011, the years commenced with an enthusiastic stock market rally, only to sag into serious corrections during  the spring and summer months.  Last year’s market entered a period of  torrid recovery from the heavy sell-off during the summer of 2011, thanks largely to “goosing” by the Federal Reserve and loosening credit policies by the European Central bank. New recovery highs were seen for indexes and many stocks chalked up new all time price highs in recent weeks. Corporate balance sheets are generally healthy and the improved balance sheets of American consumers have sustained healthy revenues for companies ranging from Verizon to Intel, from PPG (a glass and coatings company) to Simon Property, the shopping mall giant. But it seems we have again entered the season of market correction. And while I’ll leave the “why”  to the quoted economists below, I cannot help but worry when commodity indexes and the new high/new low equity indicator are cascading downward while bond yields are registering new all time lows (and the price of older bonds is rising).

The conservative way in which we at Trusted Financial invest, in the “Value/balanced” style,should serve our clients well in the current darkening environment. There are many Big Picture reasons for the current sell off, and I’ve selected three analysts from whom to quote for your reading pleasure, below.  Why do I quote others? Because my job and talent is not in assessing Macro economic trends but in reacting to them appropriately when deciding what to buy, what to sell and what to hold.  Still, I do have a sneaking suspicion that we may be living through a replay of the 1930’s, in which a rapacious market crash, 1929, gave way to a healthy market rally, only to slump once again under the weight of unwise government policies, a persistent unwinding of real estate excesses and strangulation by over-regulation. The 1930’s became known as the Great Depression, but the decade was, in fact ,a series of recessions, interspersed with meaningful market rallies.  The best investment during this era high  was quality government and corporate bonds.

Despite a worrisome development in France, one with negative implications for the survival of the Euro, U.S. stocks not only managed to rally Tuesday, April 24th and a couple of our core client holdings achieved new all time price highs.  How to explain this?  An analytical service to which we subscribe, “Chart of the Day” (www.chartoftheday.com) suggests that with the “corporate earnings yield” above 4%, and over 70% of S&P 500 companies reporting positive earnings surprises, we can expect further appreciation for the market over the remainder of the year.  This, of course, does not preclude the possibility of a strong correction along the way.

Right after Thanksgiving last year, I sat at lunch with a client. We were in the midst of another hefty fall in stock prices after a market advance off last summer's crash failed at the 200 day moving average. The financial press was mostly gloom and doom. High unemployment, another bad housing report, pre Christmas retail sales in doubt etc. [...]