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2009 Returns Very Strong

Sorry I haven’t posted anything this month. I was on vacation the first two weeks and have been busy the last two playing catch-up.

The good news is that our managed accounts were up significantly for the first five months of the year. The average account was up in the low double digits – some were higher (the more aggressive ones were up 24% YTD) and some were lower (the more conservative ones and those with directed assets we cannot sell were up in the 8% range). No matter what the client’s objective they significantly outperformed the broader markets.

Why was this? Timing and strategy.

I have written quite a bit about our view that the market had bottomed in early March and that we had moved money from money markets and bonds into the equity market. We were quite fortunate to have hit the timing just right. In addition, we updated our Investment Strategy, detailing it in the March quarter-end statements.

Here is a summary of our Investment Strategy cut/paste from the statements:

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As we move through this rally toward the 200-day moving average, we will likely consolidate the gains in the short-term until we start a new bull market, here are the strategic areas that we will focus on in our equity investment management:

  • Agriculture (it continues to have the best investment fundamentals of any sector and will outperform when a new bull market begins),
  • Information Technology (growth stocks outperform during the recovery phase of the market),
  • Energy (the Chinese stimulus will increase demand for petroleum products – we are in the process of reviewing all holdings in the energy sector to determine which companies will realize the most benefits),
  • Industrial Metals (the Chinese stimulus has already increased demand for Copper, always the first to respond to increased economic activity),
  • Financials (after at least two years where we have avoided financials, based upon the government’s liquidity, bank rescue plan, and explicit guarantees, we have begun to build positions in this sector), and
  • Commodities and Gold (we are currently in the beginning stages of an inflation issue – its being masked by the economic downturn, but the strength in these two areas demonstrates that we must have exposure here in order to outperform long-term).

We have also updated our Investment Strategy to reduce emphasis on the following areas:

  • Health Care and Biotechnology (the proposals being floated in the Capital relative to the country’s health care system have had a very negative impact on the stocks in these sectors – until all details are known they will continue to be under pressure and will not likely lead the market);
  • Consumer Staples (just as growth stocks outperform during the recovery phase of the market, value stocks like consumer staples underperform),
  • Aerospace/Defense (the long range government budget projections show decreased government spending in this sector which will likely cause it to underperform), and
  • Utilities (the Cap and Trade legislation that is being proposed will have a negative impact in the earnings of many utility companies which will likely negatively impact their stock prices and dividend payments – on the flipside, there will be some utility companies that will benefit from the improvement in the electrical grid for wind power transmission that the government says it will discuss in greater depth later in the year, so until more information is available we will de-emphasize utilities).

In the fixed income portfolios, we maintain an emphasis on Certificates of Deposit that will not lose market value as inflation expectations increase. We have also added exposure to convertible bonds and some high-yield bonds (through ETF’s and mutual funds) that tend to outperform other fixed income investments during this stage of the market cycle.

We continue to watch the technical picture and when we see the market hitting our 975 S&P target, we will reassess. We may set a new target if appropriate or we may reduce exposure.

My gut feeling is that there are a lot of mutual funds and hedge funds caught in cash right now and they need to get invested before their June 30th statements are printed. This will put a floor under the market for a while. The question is how much more upside there is in this rally. That is what we are working on determining.

Have a great weekend!

Mark