In our last post in late-May, we stated that “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.” The second quarter proved to be difficult for stocks as financial storylines focused on global economic concerns, oil spill ramifications, the unemployment outlook, and further congressional regulation measures. Yet, after breaching the lower levels of our range in June and early July, the market snapped back in the third quarter to place us currently in the high 10,000s on the Dow. While this makes for a wild ride for investors, our active management allowed us to accumulate stocks offering good value when the markets recently fell.
We are confident that our active management approach will continue to outperform mutual funds. Furthermore, it has become increasingly apparent that investors demand a more active approach when it comes to growing personal wealth. The trend of investors moving away from mutual funds and toward ETFs is staggering. According to Felix Salmon of Reuters, actively-managed domestic mutual funds saw an outflow of $44 billion (1.45% of their total value) in the first seven months of 2010. Simultaneously, equity ETFs saw an inflow of $21.4 billion (3.12% of their total value). Going back another year to 2009, the numbers are -2.07% and +10.78%, respectively. We can understand this phenomenon due to the main advantages of ETFs as investment and trading vehicles, such as higher tax efficiency, lower costs, greater purchasing/selling price control, and the ability to set downside protection features.
Our active management consists of several conservative strategies: 1) Taking advantage of broad overbought and oversold conditions in the market by using index ETFs, such as SPY, DVY, IYZ, IWM, XLU, QQQQ, SCHA, and SCHF; 2) Maintaining adequate exposure in alternative investments, such as gold; 3) Buying and selling well established blue-chip companies with stable earnings, minimal liabilities, and attractive dividend yields; 4) Buying and selling closed-end bond funds that trade like stocks and provide monthly income streams of 6% to 11% annualized; 5) Utilizing covered calls on stocks and ETFs to enhance portfolio return and protect against downside risk.
While divergence has persisted regarding opinions on the future direction of the market and economy, we believe that Bernanke and the Fed will do whatever is necessary to avoid a double-dip recession in the United States. Unfortunately, for now we must endure a soft labor environment. Moreover, accelerating foreclosures point to the housing market as a drag on the economy until all the years of financing abuse has been cleared up.
The good news is that the Corporate America is lean and mean with a lot of cash and record profit margins from squeezing costs via technology and outsourcing. Additionally, the uncertainty of future tax and regulatory policies that have immobilized consumers and businesses should become clearer after the November elections. We are hopeful that these results will lead to elevated levels of optimism and create positive momentum for a better growth rate and stock market. As such, our current trading range target on the Dow is 10,550 to 11,000 prior to the election and 11,000+ after the results are in.
We ultimately believe that 2010 will be an up year for the market but that it will remain range bound for the time being. We will lighten up and take profits during extended rallies and buy when prices are attractive during corrections. The net result is superior performance to the market with controlled risk exposure.
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, Tellone Financial Services
