Bernie’s Commentary
August 10, 2011
Since Standard and Poor’s (S&P) downgraded the US long-term sovereign debt rating last Friday, the markets have been quite turbulent. The S&P downgrade occurred for many reasons:
- Congress passed the Budget Control Act on August 2nd, but fell short of creating a disciplined and long-term plan to maintain the AAA rating.
- The recent events on Capitol Hill have made S&P and many others wonder if our leaders are willing make the hard decision to get our house in order.
- Our debt burden to GDP ratio is much higher than several of our peers. To illustrate, Canada’s debt is only estimated to be 34% of GDP, Germany’s at 52%, while ours is 74%. 1
The downgrade did not have the effect on interest rates everyone feared it would. The US Treasury sector remains the largest and most liquid fixed income market in the world. There are few if any alternatives with as great a degree of price transparency and safety. Europe and the Euro appear to be a much riskier bet from a credit standpoint.
Much of the developed world is facing high levels of indebtedness which typically result in slow economic growth. Add significant policy missteps to this and one has dramatically increased market volatility. Hopefully, something good can come out of all of this turmoil. Perhaps this serves as a wake up call to our elected officials. Addressing the fiscal issues in our country is a long term challenge. Short term fixes do not work. Our economy has always been the most resilient in the world, but its future depends on policy makers coming together to make hard decisions regarding our country’s debt crisis. If policy makers fail to do so, this weekend’s downgrade could be a sign of continued fiscal deterioration. While our problem may be financial in nature, we feel the solution is political.
Many are wondering if the environment today is as bad as it was in 2008. There is no comparison since the market performance in 2008 was the result of massive deleveraging by investors and institutions. During that period every asset class was falling except treasuries and cash. Here are a few reasons we think today’s environment is different than 2008:
- Our 2nd quarter earnings season is winding down and 77% of the companies in the S&P 500 have beaten their estimates and reported earnings growth of 18% 2.
- Revenue Growth rose by 13% 2
- S&P 500 companies have record amounts of cash on hand. Without including financial firms, America has $1.75 trillion of cash sitting on their balance sheets.3
- Many bonds fell just as much as stocks during 2008, but today, bonds are still positive while stocks have fallen.
- Job growth reports are still positive unlike 2008 where jobs were being slashed.
Of course, these fantastic earnings & revenue growth numbers could be mostly due to the stimulus, QE1 and QE2, but we won’t know if these earnings will continue without a QE3.
On Monday, selling pressure reached panic levels and on Tuesday, buying pressure reached panic levels as well. As I write this, it appears panic selling is the current theme again today. Most likely, there will continue to be volatility in the markets in the short-term, but we must remember that timing the market can be dangerous and is very difficult to do since you have to be right twice. We should also recall that some of the best single day market returns happen during the worst of times. This past Tuesday August 9th was a prime example of this type of occurrence.
As always, we encourage you to reach out to any member of our team at Bernard Wolfe & Associates, Inc, to discuss and revisit your goals, objectives, or risk tolerance.
Best regards,
Bernie
1 CNN Money “Ouch! USA kicked out of Triple-A Debt Club,” Annalyn Censky, August 8, 2011
2 Bloomberg “US Stock Index Futures Extends Gains as ADP Job Growth Exceed Estimates. Michael P. Regan, August 3, 2008.
3 CTV News “Lack of Corporate Spending Marks a Different Kind of Cash Crisis, Gren Keenan August 8, 2011.
Past Performance does not guarantee future results.
August 5, 2011
As you are aware, the market had its largest drop in over two years on Thursday, August 4th. This market correction was not a major shock and we would not be surprised if there is more volatility in the days and weeks ahead. We have been expecting some type of market correction or retracement since 2010. As many of you have probably heard me say, even if this were the best of times, this market has gone up too high and too fast. Yesterday’s correction has little to do with the circus in Congress last week surrounding the debt ceiling. This has to do with concerns about Europe along with our anemic US economy. Despite this slow growth domestically, the markets have continued to rally since March of 2009. Due to our high unemployment, an expiring stimulus, and the impending government spending cuts, we believe we still find ourselves in a long-term bear market highlighted by shorter term rallies and retracements. For this reason, you have read in our commentaries or talked to us about the need for “rowing” and “sailing” strategies in a portfolio along with “alternative investments1.”These strategies can help provide a cushion for a portfolio in volatile markets, as well as opportunities for growth.
Clearly, these are uncertain times, but they are not unexpected. As always, we are here to discuss your concerns, so please feel free to reach out to us.
Best regards,
Bernie
1Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees Alternative investments can be volatile. Often managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently higher risk. There is often no secondary market for an investor’s interest in and none is expected to develop. There may be restrictions on transferring interests. These products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S.markets. Additionally they often entail commodity trading, which involves substantial risk of loss.
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Bernie’s Commentary
July 27, 2011
As you are well aware, our government has not yet reached an agreement on how to raise the US debt ceiling and lower our budget deficit through a combination of cost-cutting as well as revenue increases. There is an August 2 deadline for this agreement, with Treasury obligations coming due soon after that date.
In our recent calls and meetings with many of you, we have discussed the debt ceiling stalemate. I am confident that we share your views of disgust with both sides of the aisle in this fight. Our politicians do not seem concerned with representing our actual interests in stabilizing our economy, moreover it seems they are conducting “political theater” to get re-elected and playing a game of economic chicken with our financial future. This game hurts you and me.
We know that a deal will eventually be done, however unless it is a long-term deal, we still face risks. If the agencies that rate the credit quality of the United States believe that the agreement is simply a stopgap measure, they could potentially lower the credit quality of the US from “AAA” to “AA” or lower. We feel a credit ratings drop of this nature could cause a drop in equity prices, rising interest rates and the further decline of the dollar against other currencies.
The equity markets have just about doubled since March 9, 2009.[1] In a perfect economy with low unemployment, this increase could be hard to sustain – “trees do not grow to the sky.” We believe that the markets will eventually correct, but as we have mentioned we do not know when that will occur. In our opinion, a properly allocated portfolio with a combination of bull and bear market strategies plus alternative investments2 may be appropriate during these uncertain times.
As always, we are here to discuss your concerns. Additionally, please feel free to forward this to a family member or friend who may have similar concerns about the current debt crisis and the potential effect on their portfolio.
[1]Yahoo Finance – July 22, 2011
2Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees Alternative investments can be volatile. Often managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently higher risk. There is often no secondary market for an investor’s interest in and none is expected to develop. There may be restrictions on transferring interests. These products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S.markets. Additionally they often entail commodity trading, which involves substantial risk of loss.
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Commentary on Oil Prices
By Samantha Fraelich, CFP®
At Bernard R. Wolfe & Associates, we are paying close attention to the political turmoil in Northern Africa and the Middle East. You cannot open a newspaper or turn on the news without hearing about how the turmoil in oil rich countries has driven the price of oil up to levels we haven't seen since 2008. Higher oil prices make Americans nervous and rightfully so. Four of the last six recessions going back to the 1970's were preceded by high oil prices 1, so it is natural for us to feel uncomfortable.
Before we discuss the impact of higher oil prices on the U.S. economy, let us take a look at our economy in general. There has been a great deal of good news. While it has taken us longer to come out of this recession than many others, most economists agree that we have begun a period of expansion. Unemployment has dipped to 8.9%.2 Economic growth was 2.8% in the 4th quarter of last year3 and estimates for the first quarter of 2011 are more like 3-4% even with the higher oil prices.4 Consumer confidence is up since people seem to think more jobs are available in their area. The S&P 500 is almost double the level it was on March 9, 2009. 5 The question is will higher oil prices crash our party?
While we cannot predict what will happen in Libya or even worse what will happen if turmoil spreads to Saudi Arabia or Oman; we can discuss what higher oil prices could mean to the U.S. economy. Rising oil prices hurt the U.S. economy more than most commodities because of the large amount we import. If the price of corn goes up $1.00, the American consumer loses a $1.00, but the American farmer is richer and the money continues to circulate in our economy. When the price of oil goes up, America gets poorer. We all feel the effect of higher oil prices when we fill up at the pump or even plan our vacations.
When we think about how oil prices could affect the markets, we should remember that the market is driven mainly by corporate earnings. If economic growth slows, corporate earnings growth may slow as well. The good news is that corporate balance sheets are still looking quite strong. If higher oil prices are short-term, larger companies may keep prices level and eat the extra energy cost since consumers aren't spending as much as normal and unemployment is still quite high. This will equate to lower earnings for companies since they have to spend more on energy. If we experience an extended period of time with lower earnings, than corporations will have little choice but to pass these costs on to the consumer. Or even more dangerous, higher oil prices in the U.S. could end up being deflationary for an established economy. So while our economy seemed to be picking up steam one might expect the Fed to raise rates in the next couple of years. However, higher oil prices for an extended period of time could mean a continued loose monetary policy in the U.S. economy. In the short-term, we should definitely be prepared for a bumpy ride and hope that the turmoil does not continue spreading and that resolutions are soon found to these conflicts.
Since the markets have rallied substantially, many investors have been tempted to get more aggressive in their portfolio allocations. It always surprises us how short-term our memories are. From a risk and valuation standpoint, we think getting more aggressive at this point would be dangerous for certain investors. Investing in 2011 is very different than investing in previous years. Many of you may have seen James Glassman’s article in the Washington Post this weekend where he finally came around to balanced asset allocation* of stocks and bonds for his portfolio, a concept we have always believed. He is well known for being a long-time all equity investor, but has now admitted that current volatility levels no longer allow for all equity portfolios. He suggested a few ways to reduce the volatility but he neglected to mention the use of alternative investments** with low correlation to the traditional stock and bond portfolio. In addition to reducing the overall volatility of a portfolio, certain alternative investments can also provide income which is especially attractive when cash is paying next to nothing.
While we certainly hope the economy continues to improve over the long-term, with all of this uncertainty in the short-term, it is a good reminder that we need to stay disciplined and keep our long-term goals in mind. We’ve designed your portfolios to help you reach these goals and remain committed to helping you achieve them. As always, we are available to discuss any other questions or concerns.
1. JP Morgan Market Insights “Oil & the Economy,” Andrew Goldberg & David Lebovitz, March 4, 2011
2. USA Today, “Employers add 192,000 jobs in February,” Jeannine Aversa, March 5, 2011
3. Bureau of Economic Analysis National Economic Accounts, “Gross Domestic Product 4th quarter and Annual 2010,” Lisa Mataloni, February 25, 2011
4. Trading Economics, “United States GDP Growth Rate”, February 25, 2011.
5. Yahoo Inc! Finance, “S&P 500 Historical Chart 2 yrs”
*Asset Allocation does not guarantee against loss. It is a method used to help manage investment risk.
**Alternative Investments are often speculative, lack liquidity, lack diversification, are not subject to the same regulatory requirements as securities and mutual funds, may involve complex tax structures and delays in distributing important tax information,and may involve substantial fees. These products often execute trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. These investments may not be appropriate for all investors.
Bernie’s Commentary
February 3, 2011
2011 has started right where 2010 left off. At press time, the S&P 500 is up over 2% in a short period of time, adding to the solid performance of 2010 where we saw the equity markets provide double digit returns.[1] Several of our clients have wondered, given this recent performance, if they should be more aggressive with their portfolios. The answer to this question is different for every investor and the most important question to ask is, have your goals and risk tolerance changed? If the answer to that is "no", then we do not recommend major changes to your allocation mix.
A concern that we have for any investor is the desire to chase returns. The volatile markets we have experienced over the last three and a half years may let us forget the basic principals of investing. Adding equity exposure to get more aggressive strictly due to last year's performance may be a recipe for disaster. We design your portfolio based on your individual risk tolerance and your specific financial plan.
Additionally, the most important number in your portfolio is the aggregated, bottom line return. In the development of your portfolio we have selected different strategists that complement each other but have different styles and investment models, and therefore performance will vary. You can’t expect bear market strategies to replicate bull market strategies in any given market environment. Since no one can accurately predict when the market cycles will shift, portfolios must be designed with strategies for all markets. Our goal is for the bottom line portfolio returns to meet or exceed your needs over the long-term.
We are committed to providing you with wealth management strategies and appropriate investment options based on your goals and risk tolerance. Further, my investment team is always researching new investment options that could help add value to your portfolio by reducing risk and attempting to enhance returns. We encourage all of you if you have not done so to schedule a time to come into the office for an annual review and to discuss your goals and objectives.
[1] Yahoo Finance – January 3-28, 2011 & 2010
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Bernie’s Commentary
December 26, 2010
As 2010 draws to a close, we have heard from many of you asking if we think the US economy was finally back on track based on recent events. By now most of you know about the bi-partisan agreement between the White House and Capitol Hill on a new tax law. The bill provides for extensive tax cuts across the board. All taxpayers are aided by the extension of the Bush era tax cuts and softening of estate taxes. Working Americans will be aided by the reduction of the social security tax by 2% for 2011. This change alone should add $112 billion into the economy and may help boost consumer spending by the largest segment of the population.1 Corporations were also included with several tax cuts for equipment purchases.
While I applaud the government’s efforts to guide our country back, I continue to believe the growth we have witnessed is not sustainable. Over the past 18 months, growth was due to pent-up demand and stimulus spending by the Federal Government. The economy must reach a point of growth without stimulus to be truly “recovered”. We still suffer from little new credit generation from the banks and our government debt levels remain over 100% of our GNP. The job growth following this recession continues to be much slower than past recessions.
So, once all of this information is digested, what does it all mean for my portfolio?
For the most part, the US and world economies have been resilient and will continue to grow over the long-term. Our economy has improved over the past year, but must improve to a sustained growth rate that will reduce unemployment. We just don’t know when that will occur. Our philosophy has always been to meet your long-term wealth management goals regardless of the current market outlook and your portfolio is designed with that in mind. If your need is conservative, we can develop a comprehensive portfolio that is conservative. If your risk tolerance is more aggressive, we can help implement a more aggressive strategy. When your needs change, we are here to recommend the appropriate portfolio changes that match your needs. When the tax or estate laws change, we can incorporate those changes through review with you and/or your other advisors. While the markets may have good and bad cycles, your overall portfolio should always reflect the strategy that is best suited to your individual needs.
Other brokers and advisors may make major across-the-board shifts in their clients’ portfolio based on some tidbit of information. This “home run” strategy ignores the client’s individual needs and risk tolerance. As you know most home-run sluggers tend to strike out more than they connect. While baseball is a game, wealth management is far more serious and we treat it that way. We assess the market and our portfolio strategists daily and can act quickly and without cost if a change is in order, due to our open architecture investment platform.
As always, if you have any questions, our entire team is here to help. Do not hesitate to call any of us.
In the spirit of the holiday season, our team will be volunteering our time at The Fisher House on the Walter Reed Army Medical Center. The Fisher House provides lodging and services to families of Wounded Warriors.
From all of us at Bernard Wolfe & Associates, please have a safe, healthy and happy holiday season and 2011.
1 – The Washington Post – New tax laws, Allan Sloan, Dec 21, 2010
Bernie’s Commentary
November 15, 2010
Fiduciary Responsibility in the News
Many of you have read about this topic in the news recently. It had become a major financial planning and regulatory issue more now than ever before; thanks in no small part to the Madoff scandal along with the near financial collapse of 2008.
Most investors believe that the fiduciary standard already applies to anyone selling financial products or providing investment advice. This is not the case as stock brokers, insurance and annuity salespeople and retirement plan providers may not hold themselves out as fiduciaries. Over time, the government will most likely determine a level of responsibility that advisors will need to adhere to for investors.
We believe that a stringent requirement would be appropriate. Your financial future will have a lot to do with the success of your investment accounts, 401K's, as well other retirement plans. Appropriate recommendations and investments based on your risk-tolerance and investment horizon are vital to long-term investment success. Rest assured that Bernard Wolfe & Associates maintains a fiduciary responsibility for all client accounts and relationships. Additionally all of our advisors are CFP® professionals and are held to the industry’s highest level of ethical and professional conduct.
We take this very seriously. You have entrusted a great deal to us and you deserve nothing less. So while our peers are questioning whether they are fiduciaries, we will continue to act as we have done in the past. We have a Fiduciary Responsibility and try to add value to your financial plan.
Recognition from our Clients and Peers!
We would like to announce that we were once again recognized by Washingtonian Magazine as one of the area’s top Financial Advisers (November 2010, page 94). The list is compiled through a survey of our peers in financial planning, estate law and accounting. As I have told you so often in the past, there is no bigger compliment than our clients and our peers recommending our services.
We are very appreciative of the many friends, family, and co-workers that you have introduced to us. Bernard R. Wolfe & Associates, Inc. is still looking to grow. As we grow, we are able to provide more comprehensive wealth management solutions and strategies to our clients on a greater scale. Your introductions reaffirm that the work we do as your “trusted advisor” is appreciated.
Planning Focus
2010 is quickly coming to a close. There are several changes to the tax code and estate planning rules on the horizon. Now is as good a time as any to focus on your long-term financial planning goals and address these issues. We look forward to meeting with our clients on an individual basis to discuss some of these issues and how they may impact your financial situation. As always, we value the confidence you have placed in us and will continue to work with you in achieving your financial goals.
Bernie’s Commentary
August 27, 2010
Over the last two and a half years we have experienced tremendous swings in both the equity and bond markets. Our economy experienced a recession and now struggles to gain ground in the recovery. Our unemployment is close to 10%.[1] Existing home sales dropped to the lowest level since 1999.[2] Our Debt-to-GDP ratio is nearing historic highs.[3] Clearly these are significant obstacles to overcome. During this market upheaval, we have researched and added several new strategies that are designed to weather difficult markets better than the more traditional “buy and hold” strategies. We are always exploring new investment and financial planning strategies that we hope will help our clients meet their Wealth Management goals.
We can add all of the fancy new strategies available to try to be as prepared as possible for a market downturn, but I think it’s time to remind ourselves of what it means to be an investor. Let’s get back to basics. To be an investor, one must take on a certain amount of risk. Often the temptation lingers to put all of your money in cash. People think this will ensure that you will never “lose money.” The reality is that moving one’s portfolio into cash may result in the long-term loss of buying power. In other words, cash does not keep up with inflation.
The basic components of our investment strategy are the same as they have always been:
1. Asset Allocation[4]: Your money is spread amongst several different asset classes: small, mid, and large cap equities, various bonds and other fixed income investments, domestic and international equities, cash, alternative investments and real estate. We choose appropriate portfolios based on your age, risk tolerance, and financial planning objectives.
2. Rebalance[5]: Our strategists rebalance your portfolios based on their strategic or tactical approaches. Rebalancing involves periodically buying or selling assets in your portfolio to fit within your risk profile. Failure to rebalance can result in a portfolio that’s much more aggressive or conservative than originally intended. This strategy provides discipline to the portfolio and helps eliminate emotional decisions to buy or sell.
3. No Market Timing: One of the worst and most common mistakes any investor can make is buying or selling based on emotion. The urge to sell everything and sit in cash is even more tempting these days since we are constantly exposed to 24 hour cable news and dueling business channels dispensing fear. We all know bad news sells. Billionaire hedge fund managers writing blogs and other talking heads on TV do not know what your personal financial plan looks like. We do. Talk to us. Every member of our investment team is a Certified Financial Planner™ and is aware of your personal situation and goals. We are here to answer any of your questions.
4. Continue to Save: For those of you still earning, continue to save whether it be in your retirement plan available through work and/or in the accounts that we manage for you. Periodic investments into these accounts help smooth out these volatile markets.
There are no “Get Rich Quick” schemes available, nor any investments that will only go up with zero risk. The only way I know is to work hard, save hard, and invest periodically while following a disciplined financial plan. For those who are nearing retirement or are retired, your portfolios are positioned differently as you may be entering the wealth distribution phase. We are sharply focused on minimizing downside risk as your investment time horizon is shorter then those who are still working and in the wealth accumulation phase. In my thirty years in business, I’ve never met an investor who succeeded in outsmarting the markets on a continual basis. I certainly do not try to do it myself. As an investor, I follow all of the aforementioned basics of investing.
In closing, we know that investing is an emotional issue because your portfolio is your security. It is difficult to take emotions out of the decision-making process and that is why you choose to work with us. Our job is to provide the guidance and the proper institutional investment strategists for your long-term Wealth Management plan. As always, we are here to meet with you to discuss your concerns and your goals in person or by phone.
[1] NY Daily News – “US economic growth continues to fall” August 27, 2010
[2] Wall Street Journal – “Existing home sales plunged in July” August 25, 2010
[3] Congressional Budget Office – “Federal debt and the risk of a fiscal crisis” July 27, 2010
[4] Asset Allocation does not protect against the loss of principal due to market fluctuation
[5] Rebalancing assets can have tax consequences. If you sell assets in a taxable account you may have to pay tax on any gain resulting from the sale. Please consult your tax advisor.
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Bernie’s Commentary
July 2010
I hope all of you are having an enjoyable summer despite the record breaking heat on most of the eastern seaboard. The rally we experienced in the equity markets in 2009 and the first quarter of 2010 cooled off in the 2nd quarter with a 12% drop in the S&P 500 over that time.1 As we stated before, we were cautious during the rally because it was too much and too fast and we felt a correction would come soon. We may have just had that correction.
Recently, we have seen the media warn of a “double-dip recession”. While I don’t personally believe that we will have this double-dip, I do see our recovery taking longer than we traditionally experience following recession. Until unemployment rates drop and our housing market finds rock-bottom, it will be difficult for growth to resume pre-recession rates. On the positive side, corporate balance sheets have near record amounts of cash. Leaders of business and industry are reluctant to put the cash to work due to the uncertainty of our fragile economy. One byproduct of this cash is a pickup in mergers and acquisitions, which usually follows with positive equity markets.
We continue to consult with our strategists on their portfolio allocations and strategies.
This week we attended our Q2 Investor Policy Committee Meeting. The purpose for the meeting is to get an update from our strategists and to review how they are positioning their portfolios moving forward within their respective models. While no one can tell us with certainty the near-term direction of the markets, there is no question that diversifying among different types of strategies may reduce overall volatility not only in the short-term, but over the long-term as well. In light of this we plan to have more detailed discussions with you over the next quarter.
In order to provide added value to your wealth management services, we are working closely with our partner firms and have begun reviewing our clients various insurance contracts. We utilize their expertise for specialized life, health and property & casualty (P&C) insurance. In the current environment every dollar counts and if there are ways that we can reduce costs, improve benefits, or identify critical needs within your wealth management plan, we will work with you to address them.
Above all we wish you a healthy rest of the summer. Please do not hesitate to contact us to discuss any wealth management topics or just to say hi.
Best regards,
Bernie Wolfe, CFP®
1 – Business Week - US Stocks Drop, Kelly Bit, June 31, 2010
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Bernie’s Commentary
April 21, 2010
Most of our client meetings begin with a brief discussion about the economy and the markets. Since the second quarter of 2010 is underway and the stock markets continue their journey upward, I want to share some of our thoughts. Most of you have heard us say that we do not feel that we are in the next great bull market and a cautious approach is necessary. I am the first to say that I do not know which direction the market is headed, but given the latest rally, I do believe that the stock markets can no longer be considered undervalued. The S&P 500 has increased nearly 80% since March 9, 20091. In our opinion, some of the reasons for this rally are as follows:
- Earnings have been better than expected
- The government stimulus plans have aided consumer spending
- Money markets are yielding very little interest and investors realize that the potential rise in interest rates make bonds less attractive. This makes equities a more attractive option.
- The global financial system has improved after teetering on the brink of collapse
In addition, the consumer sentiment has improved and while still weak, the purchasing index is improving.
This is where our caution comes into play. Assuming that our global economy was perfect, this rise in the markets has still been too fast and too high. Historically, great bull markets begin when Price/Earnings2 ratios are in the single digits. As of 3/31/10, the P/E ratio of the S&P 500 was 18.3. Earnings would need to fall or equity prices correct to move towards single digits. A few other causes for concern are as follows:
- High unemployment
- A primary factor in higher earnings pertains to cost cutting. You can’t cut costs forever without quality suffering.
- The US is drowning in debt
- The stimulus plans/government spending will need to stop at some point
- The commercial real estate market is deteriorating
We are not overly optimistic or pessimistic, especially since the markets can be very unpredictable. Oftentimes we see the markets move in the opposite direction from where the economic indicators would lead. For this reason, we believe every portfolio should have an appropriate mix of strategies which may outperform during both bull and bear markets. It appears to us that the easy returns achieved since March ‘09 will be more difficult to realize moving forward. Therefore, we believe that active management3 and the focus on investing based on fundamentals will be increasingly important. Our open architecture style of investing allows us to react quickly and gives us the ability to adapt to changes in the markets, as well as your financial situation. We will be in touch on an individual basis if we believe any changes are in order.
1 BusinessWeek “After 79% Jump, Are Stocks Still Cheap?” April 22, 2010
2 Price/earnings (P/E) ratio if the most common measure of how expensive a stock is. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period.
3 Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell.
Bernie’s Commentary
