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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Wondering what the latest unemployment figures are for different geographic areas?  Press the Ctrl key and click the link below for a very interesting map.  Once the map is displayed be sure to press play for the full effect.  
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Around the Water Cooler

Thanks to everyone who brought in donations for the Haven of Lake and Sumter!  With your help we were able to fill one whole vehicle with clothes, toiletries, shoes and toys.  What a great feeling!!!  This quarter we will be supporting the Leesburg Humane Society.  Donations will be accepted throughout April, May and June and much is needed.  Some of the items on the facility’s wishlist include Pedigree Small Bites dog food, Purina Cat Chow, bleach, paper towels and laundry detergent.  For a full list of items please call Sarah at RWM.
 

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

In our continuing analysis of equity positions, we have sold the following positions this past week: NFLX, AFAM, AZN, ENI, HNZ, IBM, NE, and SJM.  We feel now is a good time to take some profits off the table and invest more moderately.
 

We have decided to forego our fund highlight this week, to give you, instead, our take on the investing environment.
Dear Reader,

We are becoming concerned that equities are fairly valued or perhaps somewhat overvalued at this point, though no one knows for certain.  Given the stock market's performance in 2009 and so far this quarter, we think it is prudent to analyze and rebalance portfolios to reduce risk and hopefully improve risk-adjusted performance over the remainder of 2010. 

 In December 2009, our view was that the Dow could reach 11,000 by the end of the first quarter 2010.  Today (3/30/2010) it closed at 11,907 and change, believe it or not an 18-month high.  So the question is “how much higher and when?”  Here are our thoughts and what we believe is an appropriate plan of action.

Initially, in this recovery, GDP increased largely based on inventory buildup to more normal levels.  That didn’t really help unemployment.  Stock market increases were based more on rising expectations than reality.   Companies operated efficiently and drove earnings up, but sales weren’t there.  The government stimulus packages helped too, but whether it was all well spent is arguable.

The next 6-8 months may well be more difficult for the stock market.  Many of the headwinds that propelled the recovery thus far may not be with us for the rest of the year.  Consumer spending is up, but income is not…so the spending is coming from personal savings.  Unemployment is going to be a sticky issue for some time as the long-term unemployed may have to learn new skills and change fields.  In light of this, GDP growth likely will be sluggishly higher (gross domestic product is the sum of all goods and services produced within our borders, including foreign companies who are here).

Make no mistake, the economy is recovering, but as support mechanisms (stimulus, the Fed, etc.) are withdrawn, it will boil down to corporate earnings generated from increasing sales.  Sales won’t take off until people are ready to spend again.

Then there is the issue of mid-term elections and all that uncertainty.  We still believe the DOW could reach 11,500 or even 12,000 this year, but what if we are wrong?

Equities and fixed income have rebounded considerably, so it seems a good time to carefully review each account and portfolio with an eye to moderating investment risk in the event the stock market goes through a consolidation process (nice term for not much upward movement) for the next two quarters or so.
Generally for each client, our approach will be to look at how investments are allocated (fixed income, moderate, growth, for example).  Then we’ll compare the actual allocation with what we believe the allocation should be, given the client’s circumstances.  If you are a client with a retirement distribution strategy (RDS) already in place, we’ll rebalance your overall portfolio to reflect your unique RDS.  This may involve selling one asset class, for example a growth fund, and buying another asset class, say a moderate or income fund. 

As we go through this process, we’ll also be recommending the sale of certain stocks, funds and ETFs (exchange-traded funds).  By doing so, we expect to improve the risk/reward characteristics of all portfolios and make our own investment research process more effective.

As a client, you’ll hear from us in the coming weeks, in the form of a detailed email outlining your present investment allocation, the desired allocation and recommendations for specific investment changes.  This is the culmination of significant amounts of research and focus on strategy at our investment meetings.
We invite your questions and thoughts on what we are doing.  We welcome the opportunity to personally meet or speak with you, so please don’t hesitate to call to talk or schedule a meeting.
Respectfully,
Tom Hepner, MBA
 

The stock market seems to be climbing the proverbial "wall of worry."

Despite potential road hazards such as sovereign debt issues, rising interest rates, a weak job market, and a stalled housing recovery, investors bid up stock prices last week to an 18-month high, according to MarketWatch.
Of course, these things could eventually affect stock prices, but, for now, stocks are riding the momentum of improving earnings and some underlying stability in the economy.

Lack of job growth has been a major problem for our economy the past couple years, but that could change this week. On April 2, the government will release the March employment report and, according to CNBC, economists expect it to show a rise of about 200,000 non-farm jobs. That would be a small down payment on the 8.4 million jobs lost since December 2007, according to Bloomberg. The fact that the S&P 500 has risen for four consecutive weeks may suggest that the market has been anticipating a good report. Ironically, on the day the employment report is released, the U.S. stock market will be closed for the Good Friday holiday, so we won't know the market's reaction until the following Monday.

Fear of a double-dip recession seems to be fading, too. In its final revision, the Commerce Department said fourth quarter 2009 GDP increased at a 5.6% annualized rate, which is the fastest rate in six years. For 2010, economists surveyed by MarketWatch expect GDP to expand at a non-recessionary 3% rate. On a regional note, the Great Lakes commercial shipping season has started early partly due to increased demand for iron ore and coal. "Things are moving quicker, sooner than a year ago. And it seems like more ships are involved," said Eric Reinelt, Port of Milwaukee executive director as quoted in the March 28 edition of the Milwaukee Journal Sentinel.

So, despite the worries, there is some good economic news supporting stock prices.

THE DAY OF RECKONING due to our country's ballooning deficits may be getting closer. Back in 2008, the Congressional Budget Office (CBO), projected the U.S. would run a budget surplus of $247 billion for the years 2009 through 2018. Now, just two years later, CNBC and the CBO have crunched the numbers again and project that we will incur a $7.4 trillion deficit during that 10-year period, according to a March 26 CNBC article.

How could the situation deteriorate so much in just two years?

The CBO said 57% of the projected deficit increase was due to lower government revenues--much of which is due to the decline in our economy and projected sluggish economic growth. The other 43% included expenses such as, "the stimulus bill, a change in accounting for the war, extended unemployment benefits, and additional interest on debt." 

At the end of 2009, the U.S. national debt stood at $12.3 trillion, according to the Treasury Department. Tack on the projected deficit over the next 10 years and we could be close to $20 trillion in the hole 10 years hence.

Like chocolate chip cookie dough, a spoonful of annual deficit and national debt is fine, but gorging our country on borrowed money may eventually cause significant problems. Too much government debt could lead to rising interest rates and slower economic growth, according to Fortune Magazine. In a worst-case scenario, it could lead to economic collapse.

We have several options to solve the budding debt problem before it gets completely out of hand. First, we could grow our way out of it. This is the preferred method and the least painful. Second, we could raise taxes. Third, we could cut government spending. Most likely, we'll see a combination of the three.

Given the magnitude of our swelling deficits, we will likely have pain in our future. Whether that pain happens in our generation, our children's, or our grandchildren's, remains to be seen.
 

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.

"The way to wealth depends on just two words, industry and frugality."
--Benjamin Franklin

Best regards,

Thomas H. Ruggie, ChFC, CFP
* The Standard & Poor's 500 (S&P 500) is an unmanaged 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.