Sunday, December 28, 2008

Private Client Commentary - Economic Outlook

Dear Clients,

If you would have told me fourteen months ago, when the Dow was at fourteen thousand, that we'd be sitting here today, shell-shocked by a bear market that took the popular index (at one point) down to 7,400+, I would have asked you what you been smoking.

Yet here we are, and based on the forecasts of many an economist, such as these two that were featured last week on, we're apparently staring into the abyss.

"The economy is in a bit of a free fall," says Nariman Behravesh, chief economist at Global Insight. Behravesh is among those who now expect the economy to contract as much as 5 percent on an annualized basis in the first quarter, followed by a small contraction in the second quarter. Global Insight's outlook assumes President-elect Barack Obama and Co. "do something big, bold and swift," explains Behravesh. "If they don't, then for sure this is the worst recession in the Cold War period."

Bank of America's chief economist Mickey Levy is forecasting a decline in every quarter of 2009 and doesn't see a return to trend, or normal, growth until early to mid 2010. "The enormous correction in housing will continue through next summer, accompanied by a rapid rise in unemployment and declining corporate profits," Levy says.

Either the doomsayers far outnumber the Pollyanna's when it comes to the current state of the economy, or the doomsday headlines simply sell more media. Nonetheless, you can't deny that the reality of the recent statistics supports the spirit of today's headlines. But another thing we can't deny is that even the doomsayers, like BofA's Levy (who is among the more pessimistic), forecast an ultimate end of the pain (early to mid 2010 in Levy's case).

Here are a couple of relatively optimistic (a little harder to find) outlooks also taken from CNBC's website:

"The recession will end sometime in the first quarter, followed by a not great-shakes recovery," says Ram Bhagavatula, managing director at Combinatorics Capital. "There's room for optimism. Both the Fed and Treasury have done a lot more than they usually do at this point in the cycle."

Housing Related Comment: Optimists point to relatively stable sales over the past year, declines in new and planned construction and the recent sharp drop in mortgage rates. "We are starting to find the critical elements to a housing bottom," says David Resler, chief economist at Nomura International, adding a late spring rebound in sales and prices is "not out of the question."

If indeed the problem began with housing, many believe that housing is the key to a sustainable economic recovery.

I've made it my practice lately to reference the comments of arguably the most successful investor of all time, Warren Buffet. Why? Because I find it fascinating that the greatest there's ever been, and currently the richest man on the planet, has done it by following the most basic fundamental rules of investing. When asked what his favorite holding period for stocks is, he says "forever".

Buffet told CNBC the following in August 2007 and repeatedly throughout 2008:

"We'll survive current and future recessions just as we've survived past problems. We've got a wonderful economy... There's never been anything like that in the history of the world. We live seven times better than the people did a century ago on average... We've had problems all along. If you look at the last century, we had that Great Depression and World War Two, we had the Cold War, we had the atomic bomb, but the country does well."

"Recessions will create opportunities. I made by far the best buys I've ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sort of things. But stocks were cheap."

In October

Friday, December 19, 2008

Private Client Commentary - Fed moves

Dear Clients,

Wow! And again I say Wow! Can you believe what the Fed plans to do to bring this economy out of what has turned out to be the worst recession in decades?

In case you missed it, they lowered the Fed Funds rate (rate banks charge each other on overnight loans) target to a range of 0 to 0.25%. And, according to their post meeting statement, they are committed to keeping short-term rates very low for the foreseeable future. They also plan to significantly increase their buying of Freddie Mac and Fannie Mae debt, effectively forcing mortgage rates lower

Monday, December 15, 2008

Private Client Commentary - fund holdings

Dear Clients,

There is of course a whole lot going on that we can talk about; the auto bailout, fed meeting on interest rates, massive global stimulus attempts, the worst recession since the early 80's, etc, etc. But just for today, rather than focus on any of the above, let's take a look at a few of the top holdings within a large cap growth fund that occupies the majority of the portfolios we service.

This particular fund currently holds 291 stocks. The following six are among the largest positions (in terms of the percentage of the portfolio each occupies).

Keeping with last week's theme, as you read the brief profiles, ask yourself if you see these companies continuing to produce their products and/or services in the years to come.

GE (represents 1.2% of the portfolio)
The diversified technology, media and financial services company with products and services ranging from aircraft engines, power generation, water processing and security technology to medical imaging, business and consumer financing, media content and industrial products, it serves customers in more than 100 countries.

Current share price: $17.11
One year high: $38.52
Price to Earnings Ratio: 8.1
Dividend Yield: 7.25%

Microsoft (represents 2.25% of the portfolio)
Microsoft Corporation develops, manufactures, licenses and supports a range of software products for computing devices. The Company's software products include operating systems for servers, personal computers and intelligent devices, server applications for distributed computing environments, information worker productivity applications, business solution applications, high-performance computing applications and software development tools and video games.

Current share price: $18.98
One year high: $36.72
Price to Earnings Ratio: 10.2
Dividend Yield: 2.67%

Apple (represents 1.15% of the portfolio)
Apple Inc. designs, manufactures, and markets personal computers, portable digital music players, and mobile communication devices and sells a variety of related software, services, peripherals, and networking solutions.

Current share price: $98.27
One year high: $202.96
Price to Earnings Ratio: 18.3
Dividend Yield: n/a

PepsiCo (represents .90% of the portfolio)
PepsiCo, Inc. is a global snack and beverage company. The Company manufactures, markets and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods. The Company is organized into four divisions: Frito-Lay North America (FLNA), PepsiCo Beverages North America (PBNA), PepsiCo International (PI) and Quaker Foods North America (QFNA). Its North American divisions operate in the United States and Canada. Its international division sells products in approximately 200 countries, with operations in Mexico and the United Kingdom.

Current share price: $51.81
One year high: $79.79
Price to Earnings Ratio: 14.9
Dividend Yield: 3.23%

Medtronic, Inc. (represents 1.24% of the portfolio)
Medtronic, Inc. (Medtronic) is a global player in medical technology, alleviating pain, restoring health, and extending life for millions of people around the world. The Company operates in seven business segments: Cardiac Rhythm Disease Management (CRDM); Spinal; Cardiovascular; Neuromodulation; Diabetes; Surgical Technologies, and Physio-Control.

Current share price: $29.85
One year high: $56.97
Price to Earnings Ratio: 15.3
Dividend Yield: 2.45%

Target Corp. (represents 1.3% of the portfolio)
Target Corporation operates general merchandise and food discount stores in the United States, which include Target and SuperTarget stores. The Company offers both everyday essentials and fashionable differentiated merchandise. Target

Wednesday, December 10, 2008

Private Client Commentary - look into the future

Dear Clients,

For today's commentary we'll eavesdrop once again on a conversation between our Investor and Advisor duo.

As I've suggested before, virtually all of you have been very patient as this now ten month old bear market has done a number on the value of your equity positions. I know this isn't the first bear market for most of you, and I'm guessing that's one reason why no one's getting too excited. Nonetheless, I'll bet there are times when you can relate to our Investor friend below.

Take care,

Ps: always keep in mind; if you'd ever like to chat between review meetings about the market, the economy, etc., we welcome your call.

Investor: Man this market frustrates me. Up one day, down the next. It seems like lately we're just not getting anywhere!

Advisor: I know what you mean.

Investor: You know what I mean? Don't you have anything pithy to offer me?

Advisor: Nope, I simply agree - it seems like lately, we're just not getting anywhere.

Investor: So how long do we keep doing this?

Advisor: How long do we keep doing what?

Investor: How long do we keep doing what we're doing? Which seems like absolutely nothing! And are you messing with me again?

Advisor: Nope, not messing with you, just want to be clear what you're asking. Because, as you suggest, we're not really doing much - other than sticking with our long-term plan.

Investor: Okay, so how long do we stick with our long-term plan?

Advisor: Okay, I swear I'm not messing with you, but my answer is - we'll stick with our long-term plan for a long-time, otherwise it's not a long-term plan, now is it?

And you see, this bear market we're in began just ten months ago, which at this point makes it about average in length (as past bear markets have gone). And, in investment terms, ten months is very short-term.

Investor: All right, I get it. I guess I'm just getting impatient - tired of getting my monthly statements showing my declining balance.

Advisor: I feel ya, but that's what happens when we're in a bear market. And always keep in mind - you're monthly investment statement is not like a bank statement.

What I mean is; when your bank statement shows a decline, it's because you spent some money and you truly have less of what you had the previous month. When your investment statement shows a decline, and you haven't taken a withdrawal, you still have all the stuff you had the previous month. It's just that this month's appraisal of the stuff is lower than the last month's. You indeed haven't lost unless you sell some of your stuff when the price is down - which again, you wouldn't do if you have a long-term plan. The beauty of thinking long-term is you simply never have to sell in a down market.

Now, do I need to remind you of all the underlying benefits that bear markets bring?

Investor: Oh please don't! You've made your points very clearly, over and over again with all your commentaries!

Advisor: I thought you might say that

Friday, December 5, 2008

Private Client Commentary - anybody's guess

Dear Clients,

I received an email yesterday asking on what basis some of these forecasters on television are making their dire predictions