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.

If you have family, friends, or colleagues that might enjoy receiving our weekly commentary, please reply to this email with their email address and we will ask for their permission to be added.
 

Contact Us

We are here for you!
2100 Lake Eustis Drive, Tavares, FL 32778
Office (352) 343-2700
Fax (352) 742-2607

www.ruggiewealth.com
 

Around the Water Cooler

Please bear with us this Friday, February 19th as we perform a system update that was originally scheduled for February 15th. The update will require that our system have some downtime that should be minimal but we will still be able to process any and all requests. Thanks for your patience!
 

Portfolio Changes

This week the changes to our Portfolio are affected by the sells listed below.
 

Sells

Diamond Offshore Drilling, Inc. (DO): As part of our screening process, we felt it was time to sell this holding. Its overall growth performance in recent years has been slowing down considerably.

Janus Contrarian Fund (JSVAX): Due to our screening process coupled with a desire to take profits and move out of some assets we consider more aggressive into something a bit more moderate, we are sellers of JSVAX.

MFS Research Fund (MFRFX): Due to our screening process, a 3 star rating by Morningstar and no significant manager investment, we decided to sell this fund and invest in our core portfolio.

American Funds New Economy Fund (ANEFX): A three star rating by Morningstar, along with a streaky performance of heavily weighted sector investments, made us a profit taker of this fund.
 

Fund Highlight

FAIRHOLME FUND (FAIRX)

How much more committed to a fund is one manager than to invest over $150 million of personal assets? Such is the case with Bruce Berkowitz and his employees. Mr. Berkowitz has been the manager and purchaser of the Fairholme Fund since its inception in December of 1999. That type of commitment has made us a buyer of this fund in our growth portfolio since August 2008. Fairholme Fund seeks long term growth of capital by investing in a focused portfolio of equity and fixed income securities. It may shift frequently among the various asset classes and market sectors resulting in the potential for more volatility as compared to a diversified fund. FAIRX does have a stock turnover rate of around 71.09%, but is still less than the average of 80.36% for other large blend funds.

Its primary objective is to buy good businesses run by great managers, much like the philosophy of Warren Buffet. Berkowitz, however; also looks for beaten down companies with strong upside potential. He does keep large cash positions not only to preserve value, but to give him the ability to move quickly when he sees such an opportunity. Additionally, he tends to shun faddish companies and trends seeking to minimize risk.

Mr. Berkowitz was recently named Morningstar’s “Fund Manager of the Year” and “Fund Manager of the Decade”. Some might question this decision given the fund was down 28% in 2008 partially due to his purchasing distressed debt. This “error in judgment” led to a 39% return in 2009 – that’s a 67% turnaround! Each of the only two years that the fund saw a negative return was followed by significant increases in return the following year (2003 and 2009).

While FAIRX has appreciated roughly 13.92% per annum, the S&P 500 Index has decreased .80% per annum in the same timeframe. We find this reason enough to agree with Morningstar and to continue to hold FAIRX as one of our core holdings in our growth portfolio.
 

The Markets

The Reuters/University of Michigan consumer sentiment preliminary index for February that was reported last week declined slightly from the late January number and it was lower than expected as consumers continued to fret over unemployment. The index is now down 24% from January 2007, according to data from the St. Louis Federal Reserve. Ironically, when consumers are glum, that could be good news for the financial markets.

A 2002 study by Meir Statman and Kenneth Fisher found that, "Low consumer confidence is followed by high stock returns more often than it is followed by low stock returns." That seems a little counterintuitive because you would expect apprehensive consumers to be in no mood to buy financial securities and push their prices higher. On the contrary, though, the authors said, "When people lose confidence as consumers, they should regain it as investors."

So, how does this make sense?

Does this mean you should base your entire investment strategy on the level of the consumer sentiment index? No. Sentiment is just one of many indicators that may play a role in the complex interplay of factors that affect asset prices. Oh, and just for the record, the U.S. stock market did rise last week so the consumer sentiment "contrarian" indicator did work--at least for one week!

THE DRUG OF EASY MONEY will eventually be withdrawn from the worldwide economy since governments cannot indefinitely spend (or create) money that they don't have. The question of when and how that happens is looming large over the financial markets. Just in the U.S. alone, we invested (spent?) trillions of dollars propping up the economy, according to CNN, and so far, it has helped avert a potentially even larger disaster. Unfortunately, it may have just delayed the next day of reckoning.

So, how do you withdraw the drug of easy money from an economy without tipping it back into a recession? Very carefully! The Economist has identified three key issues to address in order to pull off an effective exit strategy.

First, you have to get the timing right. If you pull the stimulus too soon, you might end up with a relapse into recession. If you let the stimulus slosh through the economy too long, it could break the budget, lead to unacceptable inflation, or cause new bubbles to form.
Second, you have to get the tactics right. The two main tactics include cutting the government budget and raising interest rates. However, if you cut the budget too much, you run the risk of--you guessed it--another recession. Ditto for raising interest rates too soon.

Third, you have to get the technique right. The U.S., in particular, was zealous in creating newfangled funding mechanisms, bailout programs, backstop guarantees, and lending facilities to stop the market meltdown in 2008-09. How we unwind these programs may have a big impact on the economy so we have to get this right, too.

Ultimately, there are no easy answers to these three issues, yet they are vitally important to our economic future. And, the best way to monitor how effective the government is in answering these issues is to follow the reaction in the financial markets. Of course, we do that on your behalf so you can spend your time in areas that are most important to you.
 

 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

"Nobody can go back and start a new beginning, but anyone can start today and make a new ending."
Maria Robinson

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.