Jun 302015

Market & Investment Overview

Volatility is a fact of life for investors right now, as one crisis after another threatens stock markets around the world. Tensions in the Middle East, the euro-zone crisis, conflict in Ukraine, the Chinese market meltdown, and a pending Puerto Rico default are all keeping investors on their toes and advisors awake at night.

Those issues along with currency wars, plunging oil prices and negative interest rates all confirm that we live in unpredictable times. The volatility looks set to intensify as memories of the devastating slide in financial markets in 2008 are starting to fade; Investors having enjoyed the subsequent six-year bull run. But as bull markets mature, volatility tends to increase. That doesn’t mean the ride is over, but it is likely to get bumpier and investors should be prepared for the return of substantial ups and downs.

While doomsayers have been predicting another wipeout for the past six years, global market indicators such as the S&P500 have flown to record highs. Recent market indicators suggest caution but investors cannot just sell and sit things out until the world has solved its troubles, because that time will never come. There is plenty we can do to stay involved but protect ourselves from a significant market correction.

Recognizing a few “canaries in the mine” may have died over the past few months we have worked to reduce the short-term volatility by closely evaluating the asset allocation for each individual household. All global fixed income has been sold, most domestic fixed income has been sold (with the exception of fixed income held in the James Balanced Fund) and underperformers such as the Yacktman Fund have been trimmed and replaced with holdings focused on value based companies with strong balance sheets and long records of dividend payments. Cash continues to build across accounts and though I actively search for opportunities, we will need to see a significant market pullback (-10% plus) prior to making substantial new investment.

In uncertain times people will pay for certainty, and this tends to favor companies that can demonstrate sustainable growth, operational diversity and good management. We are constantly on the lookout for companies with strong balance sheets paying attractive dividends.

Sharp-eyed investors with time on their side are on the alert for stock market dips, because this gives them the opportunity to load up on good companies or funds at temporarily reduced prices.

Since 1950 the US stock market has fallen more than 13 per cent in a three-month period 24 times. On 15 of those occasions the market bounced back by at least 20 per cent over the following 12 months.

If you have the courage to grit your teeth and buy on the dips, volatility gives you the opportunity to build a value based portfolio rather than chasing the market and buying near highs. For many long-term investors stock market dips are not a threat at all, but an excellent buying opportunity and I believe we will have such an opportunity in the not too distant future.

Greece & Puerto Rico

I need to digress to the canaries mentioned prior- debt has the potential to be as deadly to an economy as carbon monoxide is to miners deep inside a mine tunnel. Greece is collapsing and if it hasn’t collapsed by the time I have written this page, it will collapse shortly thereafter even if the can is kicked slightly further down the road. The experts say “This collapse won’t affect America, don’t worry about it.”

This amazes me. A first world nation is belly up whether the default is official or not, and the people now live in a quasi-police state where they are lucky if they can get a measly 60 Euros per day after spending hours in line in front of one of the last few ATMs that have money available. The people elected regime after regime after regime that spent, borrowed and taxed until finally the bill came due. The Greeks are learning a lesson we would all do well to take note of – there is no financial paradise except the one that comes from working hard and saving. There is no free lunch. There is hard work, savings and investment and those who will not participate in those activities should not benefit on the back breaking work and austerity of others. The Germans have no interest in paying for the Greeks to retire at age 57.

Greece, and even more importantly Puerto Rico are the canaries in the mine. We need to pay attention to these issues. These are real lessons which need to be headed. These lessons take the theoretical and make them tangible. The United States has reached a point where if we don’t change course, you and I and our children will be doing the same thing as the Greeks, standing in line in front of a JP Morgan Chase ATM hoping to get our $60 dollars. Economics is real, numbers matter and the hard truth is that politicians, though temporarily powerful, do not have the power to change the laws of economics.

Our nation is on a debt cliff. We have a financially out of control central government – from the federal government to the local governments. It is the underfunded public pensions that are taking Puerto Rico down. According to Morningstar, Illinois (only 39% funded!), Connecticut, New Hampshire, Michigan, California, Hawaii and Massachusetts are all less than 60% funded. The outlook is grim at best. In fact, according to CNBC, 85 percent of public pensions across the United States could fail in the next 30 years. Based on the current projections for state investments, each state will come up short by about five percent per year, meaning that they won’t be able to catch up. Pension fund failures will occur in the not too distant future right here in the United States.

This reality bolsters my belief that it is the fixed income market that presents the most danger in the current markets. While cash does not offer an attractive return and I recognize investment performance matters a great deal to all of my clients, ultimately, the return of investment is more important than return on investment.

I have spent the past two quarters preparing portfolios for at least a 10% pullback in the broad markets. Since I have no crystal ball I rarely place timelines on my expectations. I would be surprised however if we can make it through the end of 2015 without a significant pullback. Our target companies have been selected and we will be buyers in the event of a market correction.

Thank you for your business and as always, please let us know if there is anything we can do to improve upon the work we do for you.


Michael R. Harding, CFP
President / Portfolio Manager