Our Commentary

The stock market routs that come about every two months this year came a couple weeks early this time. Two figures put the market’s position in perspective. We are roughly 20% below the highs experienced earlier this year. Nevertheless, we are at about the same level we were exactly one year ago. The ups and downs of the markets certainly wear on the nerves, but the volatility is not destroying fortunes as it was a few years ago. Properly allocated portfolios are weathering the storms and are poised to benefit from undervalued assets.

Our approach to equity investing is straightforward. Equity investments are segmented into several distinct asset classes ranging from large growth stock to small value stocks to international stocks. Since very few asset managers can beat their benchmark indexes over an extended period of time, it is necessary to either have a system to find the best managers or simply use the indexes. Claiming that we could pick stocks ourselves in each of the equity asset classes would be very farfetched.

Several media outlets including Bloomberg, AdvisorOne and Investment News are reporting that Rep. Steve Garrett, R-NJ, chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises led a group of Republican lawmakers in submitting a letter to SEC Chairwoman Mary Shapiro urging her to stop implementation of a fiduciary standard for investment advisors.

Tax Legislation at Last! Recent legislation passed by Congress and signed by President Obama extends the Bush-era tax cuts for all income levels, keeps tax rates on long-term capital gains and qualifying dividends the same, reduces employee payroll taxes by 2% for 2011, reinstates the estate tax with a $5 million exemption per person ($10 million for couples) and top tax rate of 35% and allows businesses to depreciate 100% of equipment through December 31, 2011. It extends as well other expiring benefits for individuals and businesses.

The Fed’s latest round of asset purchases, dubbed Quantitative Easing 2, has created a storm of criticism around the world. Quantitative easing is equivalent to printing money, something the United States has been doing for some time. The Fed buys Treasury bonds and Federal Agency securities using money it creates. By increasing the amount of money, it aims to make lending cheaper, creating investment and jobs. China and Germany are the most outspoken critics of this policy because they believe, rightfully so, that it will devalue the dollar.

“Is Your Advisor Pumping Up His Credentials?” This very informative article appeared in the Wall Street Journal’s (“Journal”) Weekend Investor column on Saturday, October 16th. -- Certainly well-established professional certifications are a way to identify qualified financial advisors and investment managers. As the Journal points out, designations such as the certified public accountant (CPA), chartered financial analysts (CFA) and certified financial planner (CFP) require rigorous study, continuing education and strict codes of ethics.

Anxiety over a sluggish economic recovery at home and fear over a renewed European debt crisis continue to drive investors to gold. Gold has had a positive run for eight straight quarters causing many to wonder, if they aren’t already invested in gold, should they be. To answer that question, we have to remind ourselves that we invest in different vehicles because they either generate a return or are expected to at some point. We want interest from bonds and dividends from value stocks. We invest in growth stocks because we believe at some point they will begin to pay a dividend.

Today’s economic data was mixed with good data here in the United States and more uncertainty in Europe. We offer some insight into both market drivers in this weeks blog entry. ---  Consumer spending increased again in August, second quarter GDP was revised upwards yesterday, and incomes are up! Consumers are also saving more, which is both good and bad. It’s good because savings makes funds available for investment. It’s bad because it cuts into consumption, and the economy depends on consumer spending.

World equity markets have taken quite a tumble over the past month while fixed income of all kinds has rallied, dropping yields. The spreads (differences in yields) between high quality debt and junk bonds has narrowed significantly. Investors are simply looking for yield anywhere they can get it. We have ridden high yield (junk) bonds for a while now, getting in during the beginning of 2009 when fear drove the spreads to historic highs. It has taken the popular press and the everyday retail investor a long time to get on the high yield bandwagon so, to us, it is time to get off.