January 12, 2010

For You BBQ Lovers

Cathy and I had dinner last week with Cathy’s niece and her new baby, Essie, who is a real charmer.  We ate at Gus’s BBQ on Fair Oaks Avenue in South Pasadena. If you like BBQ, Gus’s is worth going out of your way for.  We assumed they were just displaying some attitude when Gus’s crew recommended reservations for a 5:00 p.m. dinner, but we got one of the last tables, the place is that popular.  Memphis ribs and brisket were the most popular dishes at our table alongside the sautéed Southern greens.  Mmmmmm.

The Stock Market is Looking Healthier

Over the past few months I have spent time discussing the overhead resistance the stock market was encountering that kept it from moving through the S&P 500** value of 1,115.  Over 800 years ago Leonardo Fibonacci pointed out the significance of this.

The first meaningful breakout above 1,115 came on December 28th when the S&P 500** closed about 1% above the 1,115 mark.  However December 31st saw the S&P 500** drop back down and close at exactly 1,115.  You may cue the Twilight Zone music.

However, in the first few days of 2010 the S&P 500** bounced smartly off of the 1,115 level and looks as if it may have finally broken out to the upside – hopefully for good.  The 1,115 mark that had been resistance for 8 weeks has now turned into support, so only if we drop below that level will the Fibonacci sequence become relevant again.

Part of what is creating a good environment for stocks are the quarterly earnings reports that begin this week.  I expect them to look very good since current earnings will be compared to earnings recorded a year ago when the economic sky was falling.  It will be easy for current earnings to look good in comparison.

Corporate America, in general, has balance sheets that are in good shape.  Debt has been paid down, cash levels are good in many companies and exports are up due to more competitive prices created with lower valued dollars.

To give you an idea about the strength of some American companies, the interest rates on AAA corporate 10-year bonds is actually less than the interest on comparable US Treasuries.  (Source:  Yahoo composite bond rates)

It is extraordinary that any bond be deemed by investors to be safer than Treasuries, yet that is exactly what the interest accepted by buyers of those different bonds indicates.  What could this mean?

The cynic in me says that a bright light is being focused on the slipping credit worthiness of the federal government, and that may be.  However, the optimist in me says that the few AAA companies left in the US, have so little debt outstanding (one reason that they are rated AAA) that investors who want them really have to bid the prices up to get the bonds.  Low debt is a good thing for corporate survival rates; this is a very positive way to look at the same issue.

Also, the long maligned US dollar may have bottomed on world markets.  It is too early to tell for sure, but I noticed this turnaround last month, and my good friend Ian Naismith, manager of The Currency Fund, thinks the dollar rally “looks like it has legs.”   A rising dollar is expected to create a headwind for anything not denominated in dollars, such as foreign stocks or commodities.

However, commodities continue to rise despite a late November turnaround in the dollar.  Normally commodities can be expected to rise during periods of dollar decline and fall during periods of dollar strength, so commodity strength in the face of dollar strength is a significant indicator. This is consistent with inflation getting ready to take off as I suggested in recent newsletters.

What could cause the dollar to rise despite all of our economic problems?  As bad as our problems seem, other countries have problems equally as bad as ours. Investors around the world are acknowledging that an economic recovery is underway.  Rising interest rates, like we saw in December, accompany economic recoveries and also attract more investors for our Treasury bonds.  Foreign bond buyers must first buy dollars to pay for our Treasuries, and this creates demand for dollars.

Riddle

Q:  I am mother and father, but never birth or nurse. I’m rarely still, but I never wander. What am I?

A:  A Tree

Consider Yourself Warned

A January 7th report on Bloomberg indicated that U.S. regulators, including the Federal Reserve, have “warned banks to guard against possible losses from an end to low interest rates” and encouraged them to reduce exposure to interest rate sensitive investments or raise capital to protect themselves from impending losses.

What I read into this is that we will see another wave of bank failures as interest rates drift upward toward more normal levels (zero percent interest rates are definitely not normal).  Insurance companies, who back policies with bond-heavy portfolios, are also likely to feel the heat.

How does an investor protect themselves, their assets and their families?  What I recommend is to only have investments flexible enough to be moved when the effects of rising interest rates actually begin to show up.  By reading this newsletter, you will know when that is.

Does Anyone Read Korean?  How About Norwegian?

Last week I was interviewed by Alexandra Twin, from CNN Money.  Within two hours her story was published and flashed back and forth across the globe as it was picked up by many new services.  

The Google Alerts service we use to track such things reported that we were written up in Korean, Norwegian, and Malaysian, among others.  The problem is the only words we can understand in these articles are my name and the company.  Anyone out there read Norse?

Investeringsstrateg Will Hepburn i Hepburn Capital Management mener imidlertid at de første handelsdagene i januar typisk vil være positive og at det må komme flere dager med opptur på høyere handelsvolum før han er villig til å si at et rally virkelig har startet.

It would be nice to know what they are saying about us.

What’s Going On In Your Portfolio?

We shifted gears last week as the stock market began to show an upward direction, and have increased our stock market exposure on Careful Growth* accounts.  We’re up to 45% with another 30% in high yield bond funds along with some rising dollar and floating rate bond funds.

Additions to the stock portfolio were in the technology area, gold and gold mining stocks.

Municipal bond accounts* have been moved from a relatively stable short term muni fund to high yield munis as prices of the better yielding munis stabilized.

Socially Screened portfolios* are close-to-fully invested with technology being added to our holdings in the Women’s fund, Alternative energy and SRI growth funds.  Like all of our accounts, this portfolio also holds a good chunk of high yield bonds.

Our Spotlight Strategy

As bad as the name sounds, junk bonds are hard to beat in the way they have acted the past 10 months.  As a result, our Flexible Income* accounts remain fully invested in high yield bonds, or “junk”.

Let me give you an idea why I like junk when it is acting right.  Morningstar just named the Loomis Sayles Bond Fund the Income Fund Manager of the Year, when they earned 36.83% last year for their investors.

My Flexible Income* strategy outperformed the fund of the year by posting a 37.76% gain in 2009.  We did it by holding a lot of junk for most of the year.

I fully expect the great run that high yields have had to end before too long, as their prices rise to the extent that they are no longer as attractive as they were, and I will discuss this more in future newsletters.  For now, Flexible Income* is off to a great start in January, so we are just sitting tight.

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*    The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed.   Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account.  Not all trades are profitable.  It should not be assumed that current or future holdings will be profitable.   A list of all trades in these accounts for the past 12 months will be provided upon written request.

**  The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market.  Investors cannot invest directly in the S&P 500 Index.

Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
Municipal Income Strategy Description and Performance Information
Socially Screened Investments Description and Performance Information

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This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy.  Please discuss any legal or tax matters with your advisors in those areas.  Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.