Protecting capital requires a mix of caution and opportunism. For this reason, we have participated in the market with conservative investment strategies. To take advantage of the upswing that we witnessed over the first quarter of 2010, we have focused on purchasing shares of companies that have demonstrated strong competitive advantages that are likely to be sustainable far into the future, are financially sound, have strong positions in stable and highly profitable industries, and have good management. Additionally, through such methods as gold exposure, stop-loss orders, and covered calls, hedging of portfolios has protected portfolios from downside risk that has been especially prevalent over the past few weeks.
Our patience and commitment to this conservative strategy has been justified by the lingering economic concerns created by high unemployment, housing foreclosures, securities fraud hearings, and global debt worries. For the most part of 2010, the market presented a calm, low-volatility environment that slowly inched its way higher. Yet, after briefly breaching 11,000 on the Dow, as we foresaw back in the November blog, the market has retreated sharply by 10%. Accompanying the decline has been a surge of volatility, including the historical May 6 that presented an 11.6% intraday move.
The main culprit for incredible rise in volatility and fear is the European debt crisis. While the issue of Greece’s financial instability has been well documented over the early parts of this year, it was largely ignored as a market moving event in the US until it was recognized that the similar problems existed in other European nations, such as Spain and Portugal. Furthermore, worries of a worldwide domino-effect of debt contagion have led to uncertainty of economic recoveries around the globe. In an effort to stave off near-term contagion and to stabilize markets, the 16-nation eurozone reacted with a TARP-like $1 trillion recovery package. This massive European debt bailout may have preserved the future of the European Union, but many challenges remain. Among them are elevated government deficits impeding growth, lack of labor competitiveness, tepid consumer spending, and the threat of deflation.
The good news is that the United States economy is in much better shape than those of our friends across the Atlantic. Well into a recovery phase, US company earnings reports of 2010 have been overwhelmingly positive as companies have produced healthy balance sheets, labor productively has increased dramatically, and both corporations and consumers have increased spending. Also encouraging is that after more than two years of job losses, we have finally witnessed job creation. The latest figures showed widespread improvement in the labor market, with manufacturers, construction companies, retailers, professional and business services, education and health services, and government all reporting gains. Nevertheless, labor gains must continue at an increased pace in order to make a dent in the level of unemployment and avoid a “jobless recovery.”
Going forward we believe the stock market will anticipate a better economy and better corporate earnings and will trade up to the low 11,000 level, and then new or existing concerns will arise and pull the market down to the 10,000 level. Therefore, we feel this range bound market is ideal for our active management approach.
In order for investors to take advantage of the investment opportunities in the stock market, we always recommend that investors obtain professional advice when it comes to selecting a portfolio of stocks. Any opinions expressed in this update may be subject to change without notice, and should not be construed as a recommendation for any type of investment.
Filed under: Economy, Investments, Uncategorized
