Second Qtr 2011

I hope you are enjoying these lazy hazy days of summer….it is flying by too fast. As I write this, there is still no decision on the Debt Limit and Corporate earnings season is just getting underway.

What’s not happening too fast is how our elected official(s) in Washington are dealing with the Debt Limit which the markets continue to be spooked by. There’s not a family or business that could operate in the red the same way Washington is running our Country and the entire world is watching every move that those “Five People in the Room” make. This is a game of chicken that grown-ups should not be playing because the outcome will be devastating to all of us if they stumble and although I don’t’ think the US will default on its obligations; we are watching politics at its worst.

Second quarter earnings season is before us and it’s too early to tell how well (or not) companies have done over the past few months, but so far we have seen a few nice profit reports from some companies.  As for the economy, there are mixed reports showing slow growth and less jobs being added to the payrolls than estimated. Unemployment rose to 9.2% from 9.1% and June was the second month in a row where the number of jobs added was fewer than expected.  As I’ve said many times before, consumers will hold off on spending money in the economy except for essentials until they see more of their family and friends go back to work and their confidence in the economy has been lifted.

Aside from the distractions listed above, we are still watching what happens in the Euro Zone with countries like Greece, Spain and Italy who have some very difficult decisions to make regarding their own budgets. Supply chains seem to be recovering after Mother Nature’s wrath was felt in Japan and the US.

Ironically the markets performed well over the first half of 2011, the S&P 500 Index was up 5% and Nasdaq 4.55%. There seems to be a lot of bad news built into the stock market  which make stocks look more attractive than not and I am hopeful that my contrarian point of view can benefit investors.  As for bonds, interest rates are still closer to 0.00 % and investors might be better off diversifying with dividend paying stocks, preferred stocks or REIT’s for added income. As for gold, the latest consensus is that gold could hit $1,700 an ounce and today we crossed over $1,600 an ounce, so I’m not sure how much more upside there is left in this commodity. Everyone wants to own gold now out of fear for the world’s outlook and US dollar, but it might be time to listen to the tv commercials and sell your old jewelry at these dizzying prices.

Looking forward, I am of the belief that stocks should outperform bonds and other alternative assets. In most of the portfolios that we rebalance, we are adding more large-cap stocks as we take profits from precious metals and other commodities. Within our equity %, we feel that technology should do well even though the sector has growth scares, inventory concerns and supply chain issues thanks to Mother Nature’s unexpected tragic events felt around the world. The positives for information technology are companies with large cash balances, dividend payments which were unheard of at one time, solid management and tight inventory controls.

Industrials are another sector that has potential once the economy picks up. We tactfully invested in health care and consumer staples as a defensive place to hide during the recent volatility but are selling to invest more into technology and industrials. It’s unusual that we invest in any sector short-term, but we are hopeful that this recent swing into technology and industrials will add more profits than staying put in health and staples. Financials have been our worst performer this year because of housing issues and developing regulatory concerns but we have held onto our positions, as volatile as it has been to watch, the stock market can’t really move ahead without financials taking part.

To summarize, stocks have had a great run over the past couple years and we’ve seen the S&P 500 index almost double from its lows in March 2009. Even though the pace of growth has slowed, it is still growing and stocks look to be a better investment than other asset classes. Moderate and conservative investors still need to have bonds and other type investments in the mix, but it might pay to have a slant towards stocks in the near future.