August 2011

Monthly Thoughts and Comments


Market Notes

As we come into the summer, we expect a slowdown in the stock markets, as the old adage goes, “Sell in May and go away.” This year, there are several other items that are weighing on stocks as well…we expect a choppy summer at best…The volatility of the stock markets will provide entry and exit points for investors, and where in the past we have had months to take positions, now we often just get days. We have raised cash in the past month and expect to put it to work in the next few months.

This is the first and last paragraph from our May 2011 “Monthly Thoughts and Comments.” Between that date and now, the S&P 500 has given up all of the gains it had for the year; it lost 9.8% during that time, dropping 16.8% before recovering just over 8% in the past three weeks.

While we followed our own advice and after the drop added to our positions in industrials, energy and precious metals and patted ourselves on our prescience, we were surprised by some of the action, nonetheless. Some stocks, which historically have been very defensive, proved not to be as defensive as investors would have hoped. Consumer staples dropped 12.6%, utilities drop 13% and healthcare dropped almost 18%. And while these sectors may have outperformed the overall S&P 500 (except for healthcare), it didn’t help a whole lot!

From this we are reminded of two guiding investment principles which we believe investors should adhere to:

  1. When an asset class is not attractive, then don’t own it. One should not hold an asset just because. Buying defensive stocks because one must own stocks did not work too well for many people (cash at a paltry 0.01% paid better during this time period).
  2. Investing is a long-term strategy, but it must always be based on fundamentals. This will help guide selling and buying decisions.

To be sure that we are clear, we are not saying not to own stocks. We are saying that jumping from sector to sector over short periods of time, like the traders who sold off energy and industrials in May to buy “defensive” stocks, doesn’t add value. They would have been better of moving to cash with a portion of their investments as a hedge rather than moving to defensive stocks. They would have had the capital then to buy back in when prices were lower, and they wouldn’t have lost any money in the meantime.

Furthermore, we are not saying it did not make sense to reduce equity holdings – in fact we did reduce equity holdings back in May. We did it because we felt some stocks were priced for perfection at a time when there were plenty of risks. This type of defensive posture makes sense in a highly volatile market. But we didn’t get out of our energy, industrials and gold positions because they might go down. We raised cash where we saw less long term benefit and that gave us cash to buy more of what we do have long-term positive outlooks on, at very attractive prices.


Reruns of I Love Lucy I Get, but This is Silly…

Question: Given the following information, what is the approximate date in history?

  • Greece is heading towards a default. Ireland, Spain, Portugal, Italy and the U.K. are under tremendous stress.
  • The European banks, which hold much of this debt, are at risk and hold significant amounts of real estate and derivatives of questionable value, just like their U.S. counterparts.
  • Europeans are in the streets rioting because of the austerity measures being imposed by their governments.
  • In the U.S., there are many union members who are very angry because the general population no longer wants to pay for all of their benefits and states can no longer pay them and hide the fact.
  • Congress and the President seem to be more interested in playing politics than in addressing the financial stresses affecting our economy.
  • Most of the European governments seem to think that by adding even more debt, they will solve their debt problems.

Answer: Any time in the past two years.

Investing is about seeing trends. Whether this is applied to a specific investment, an industry or global macro investments, the key is to see trends and then apply fundamental analysis to value the opportunity.

The trend that is quite apparent is that the developed world has not addressed its fiscal and financial issues and the populations of those countries have not accepted the responsibility for addressing these problems either. Meanwhile, in the emerging markets, they will continue to fight inflation being exported by the industrialized, over-levered economies and will have to depend more on internal demand rather than exports for their growth.

Given the trends, portfolios should be well diversified by asset class, include a significant investment in fiat currency hedges (i.e. gold), substantial investments in cash even though cash provides no return, and a portion in international companies in the energy and industrial sectors.

We would continue to expect dramatic volatility until countries are forced to address the economic issues, which will happen in the end, as there will be no choice in the matter. Until that time, use the cash to slowly add to whichever sectors and individual investments get oversold intermittently and offer a good entry point or the opposite if the markets become euphoric.

Most importantly, remain focused on the long-term trends and on fundamentals and ignore the hysteria. Putting the past month into perspective, the stock market has merely gone through a normal correction of about 16% after rising over 30% in the prior ten months. This is not only normal: it is healthy, as it squeezes out excesses. In the end, calm heads, a little foresight, and patience will prevail.

Alan E. Rosenfield                                                                                                                       Managing Director




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