We were actually starting to believe that the economy was beginning to stabilize and that we could begin to apply more traditional allocations to asset classes. As often is the case, just wait a moment and, like the New England weather, everything will change. While we have seen a tremendous amount of market instability (the S&P 500 is off nearly 6.5% year to date), we continue to strive to mitigate losses and make tactical adjustments. Even though we appear to have been granted a relief from the recent volatility, we now believe that the odds of further declines are very real.
While philosophically we will always favor holding equities, we are aware that many of our clients are dependent on their portfolios to sustain their cash flows and thus owning the broad stock market at this time is akin to standing in an open field during a tornado. You do not need to suffer a direct hit to be affected. Whether you agree with the downgrade of the United States credit rating or see the major problems associated with the sovereign debt crisis in the Euro Zone as a serious risk, each of these factors have structurally and psychologically damaged investors’ perceptions. The Wall Street Journal even suggested in a recent article that many of the professionals who are charged with guiding investors have placed a significant amount of their own capital on the sidelines as they cheer on the virtues of the market to others.
We are suffering from a “Crisis of Confidence” in the very institutions that create confidence. There are typically no good endings once you start down this road. We are entering a deleveraging path and, as we have been writing for several years, much of the entire developed world is now faced with choosing from among several bad choices, some being worse than others.
The economy is once again getting weaker. What can we do? The short answer is, sadly, not much. We think there is little political will for another major stimulus program. The impact of the last stimulus program was trivial and we quickly fell back into a major debt bill with a higher level of government spending. We fully understand that lowering government spending will have negative short-term effects, but we are at the point in the endgame where we must all bite the bullet.
What about QE3? We ended up with more money on the Fed’s balance sheet and higher commodity prices. The trade data last week showed exports fell by over $2.3 billion last month suggesting a slowing world economy.
In short, there are no easy solutions. We have just about used all our “bullets” as far as fiscal and monetary policy is concerned. We now must focus on allowing the private sector to create new businesses and jobs. In addition, some commentators feel that we need a major policy initiative that will change the focus away from a financial services led economy and the political squabbling in Washington. This may help but the U.S. still needs to get a plan that includes developing an energy policy initiative that would free us from our addiction to foreign oil. Finally, our infrastructure is crumbling and, instead of wasting our human capital, we need to re-train workers to meet our current growth challenges especially for those receiving unemployment benefits.
Unless something magically changes in the next few weeks, HT Partners will begin to make tactical changes as to how we approach our investment strategy. As a tactic, we will carefully move our equity exposure toward the lower end of our asset allocation guidelines. This shift will also change our focus towards more defensive higher yielding equities as we wait for the markets to stabilize. This may not protect us completely, but will help us to earn stable single digit returns that will allow you to meet your cash flow requirements. Fixed income allocations will remain the same as we remain committed to underweighting U.S. Government Bonds and our alternative allocations will increase as we continue to focus on our “Bear Squad” investments for when those tornados blow through town.
In closing thank you again for traveling with us as we do our best to smooth out those bumps along the unfriendly skies known as the financial markets. As the famous writer Ursula K. LeGuin often said “The only thing that makes life possible is permanent, intolerable uncertainty and not knowing what comes next.”
All our best,
IMPORTANT DISCLOSURES This letter may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.” Performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss. Nothing in this letter is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice. The S&P 500 Index (S&P) has been used as a comparative benchmark because the goal of the above account is to provide equity-like returns. The S&P is one of the world’s most recognized indexes by investors and the investment industry for the equity market. The S&P, however, is not a managed portfolio and is not subject to advisory fees or trading costs. Investors cannot invest directly in the S&P 500 Index. Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.