Weekly Commentary

Weekly Commentary

Welcome to our weekly commentary. As always, feel free to call our office with any questions or comments that you may have.

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Around the Water Cooler

Congratulations to Eddie and Kelli Rojas on the birth of their son! Brooklyn Rojas was born Sunday, February 7, 2010 at 12:03 am and weighed in at 7lbs. 15 oz. Best of luck Eddie, Kelli and baby Brooklyn!
 

Portfolio Changes

This past week brought a difficult week in the equity market. My guess is there are more of you reading the commentary this week as market jitters tend to bring this out in our clients.

To summarize commentaries over the past couple of months, we continue to maintain several more aggressive holdings in some of our portfolios but for the past 6-8 weeks we have been strategically pruning some and reinvesting more moderately. Frankly, I am surprised by the market’s downward fall of late but this has really been based on some unexpected news from China and Europe. It still would not be a big surprise to finish this first quarter strong but we still expect a volatile and difficult middle of the year for 2010. However, our overall belief is a year-end, positive return for the market, possibly in the high-single digits.
 

Sells

Blackrock Global Allocation Fund (MDLOX) Although we favor global investments such as this, we moved out of this fund into one with a lower internal fee and the ability to short the market in addition to providing us with more consistent, longer-term returns.

Marsico Investments 21st Century Fund (MXXIX) Sale of this fund was part of our move from a more aggressive to a slightly more moderate portfolio with higher paying dividends. We were also able to lower internal fees by over 1%.

Mutual Series, European Fund (TEMIX) In keeping with our move to a more moderate portfolio, we sold TEMIX this past week. We felt there were better opportunities elsewhere. Although we favor global investments, we are moving away from European holdings at this point.
 

Fund Highlight

VANGUARD WELLINGTON (VWELX)

Vanguard Wellington’s strategy is simple and has been consistently executed for over 80 years with only 3 different fund managers. The managers buy undervalued, dividend paying stocks and corporate bonds (most of them investment grade), holding in a 60/40 mix. With the fund’s focus on valuations and dividends to steady the stock portion, plus high-quality bonds, we have been a buyer since early 2008 as part of a core holding in our moderate portfolio.

VWELX can be described as a cautious contrarian balanced fund. It maintains a position in such US companies as AT&T, IBM, and Exxon Mobile because of their yields, cash flow, and solid balance sheets. The fund has recently moved back into the financial sector after waiting for the banking system to shore up their capital.
Additionally, municipal securities that offer attractive yields with the backing of reliable revenue streams have crept into their portfolio. Obviously missing from their portfolio is technology hardware stocks, which recently have been one of the markets hot sectors and has held the fund back slightly. Nonetheless, VWELX has never been one to chase the “latest and greatest” or trade quickly.

There are two men who pilot this fund to its success. Collectively they have over 60 years in fund management. Ed Bousa, a vice president and portfolio manager with Wellington Management since 2000, concentrates on the equity portion of the portfolio; while John Keogh, who has been with Wellington Management since 1983, is the lead fixed-income manager.

Two of the fund’s chief characteristics are its below average volatility and broad diversification. Reflective of this strategy is the fund’s annualized return of 9.2% from September 30, 1987 through August 27, 2009, when the Dow was at 8.9% with greater volatility. Although we can’t guarantee a repeat of this performance, we are confident in investing in a fund that has survived the Great Depression and has an overall strategy which remains steady and consistent.

There are risks involved with all investments, thus we encourage you to speak with your financial advisor before making any investment choices.
 

The Markets

Volatility in the financial markets has risen noticeably in the past few weeks as investors remain on edge about a multitude of issues.

A mixed employment report for January, continued budget deficit issues in Portugal, Italy, Ireland, Greece and Spain, monetary tightening in China, and a growing sense that the worldwide economy might be running on government stimulus fumes instead of stable gas all contributed to worldwide jitters, according to the Associated Press.
In the U.S., the S&P 500 index dropped for the fourth week in a row and it is now down 7.3% from its January 15 recovery high, according to data from Yahoo! Finance. Foreign stocks, commodities, and gold are also down for the year as shown in the chart below.

The increase in investor anxiety helped send the value of the U.S. dollar up, up, and away. Last week, the dollar reached an eight-month high against the euro and a seven-month high against a trade-weighted basked of six major currencies, according to Market Watch. The good news about a stronger dollar is that it suggests investors still have faith in the U.S. as a “safe haven” in times of uncertainty.

The global economy is still recovering from the Great Recession and the path to future prosperity will likely be bumpy. With proper seat belts, though, we will do our best to make the trip as smooth as possible.

CORPORATE AMERICA IS MAKING AN EARNINGS RECOVERY, but the revenue recovery is slow to develop. For 2009, The Wall Street Journal projects that the S&P 500 companies will show a sales drop of $1.1 trillion, or 13% from the prior year. In the fourth quarter of 2009, revenue is expected to total just over $2 trillion, which would be the same number as the first quarter of 2006. In other words, this Great Recession has set corporate America’s revenue back nearly four years.

Interestingly, while revenue is back down to levels from nearly four years ago, total U.S. employment in January 2010 was back down to where it was in April 2000 – that’s nearly a 10-year setback in employment – according to data from the Department of Labor.
This indicates that on a comparative basis, corporations have cut employment more dramatically than the decline in revenue. With employment levels back to where they were in early 2000, you can see why corporations are showing solid earnings growth (up 47% so far in Q4 2009 from the year earlier quarter excluding financial companies, according to The Wall Street Journal) even though revenue growth is weak (projected to rise just 0.9% in Q4 2009 from the year earlier quarter, according to The Wall Street Journal). Corporate America is showing profit gains partly due to the leverage from keeping employment costs low.

The good news is that Corporate America cannot keep employee headcount low indefinitely if revenue starts to rise significantly. Eventually, companies have to hire to support revenue expansion. When this new revenue expansion/hiring cycle starts is anybody’s guess. But, when it does, that could be a positive sign for the financial markets.
 

 Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

Weekly Focus – Think About It

“Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and, almost invariably, abandon it at precisely the wrong time.”
David Dreman

Best regards,

Thomas H Ruggie, ChFC, CFP

* The Standard & Poor's 500 (S&P 500) is an unman-aged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.