Market Commentary

In a Decade

May 2012

"In a decade we want to look back and know we have done a good job for you" – Steve Romick, Portfolio Manager, FPA Crescent Fund, in Los Angeles earlier this week

We write with an update given the recent down performance of the US and global stock markets, and right on top of the news that the Standard & Poor's rating agency has downgraded the credit of five major Spanish banks. Investors have headline concerns once again about Greece and its potential exit from the Euro. What to do about recent developments?

As we wrote to you last month, your portfolios are positioned for a diversity of outcomes. We have had the continued concern that the global stock markets and parts of the U.S. and global bond markets could be volatile for some time to come. You are somewhat underinvested in stocks, both here and overseas. Why? While they look reasonably priced, we think companies are earning at somewhere near a peak level – so profits and stock prices both could weaken ahead. And we see many opportunities for dislocations to develop in the US and global stock markets based on economic weakness and financial system concerns in Europe. On the bond side of your portfolios, while we are heartened by the recent strength of the dollar, we are concerned about the impact a renewed debate about the U.S. debt ceiling this summer will have, as well as the amount of U.S. national debt that needs to be renewed in the coming several years. So, here and overseas, you are positioned shorter-term on the bond front. Ultimately, we continue to think we are in for possibly several more years of a volatile market and your portfolios are positioned somewhat defensively as such.

Do we like down volatility? No, and yes. No, because it stresses people out and can lead to bad decision-making. Yes, because it produces opportunity. We continue to watch and wait for an opportunity to have you more fully invested at more advantageous prices. To wit, Sue spent the day this week with one of your fund managers who quipped: "You can have good news and cheap stocks, but you can't have both at the same time."i

We realize that with an ebullient stock market earlier this year, and particularly because of your gold and foreign bond holdings, many of your portfolios are underperforming the stock market in the shorter term. And yet we think it is prudent to stick to our discipline so that we can stay on a steady course for you for the long term. We are somewhat encouraged by the data that now shows that for several years, investors have been consistently taking money out of the stock market. This shift is partly demographic, given the maturing of the baby boom generation. This shift also indicates that investors may ultimately become disinterested enough in stocks in the coming several years to make them really interesting and cheap again. We do think that by the end of this grinding bear market, stocks will become a lot more compelling and at that point we will want to have you more fully invested than you are now. We too, want to look back a decade from now and know we did a good job for you.


This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.

i"Steve Romick, citing Joe Rosenberg, long-time adviser to the Tisch family. .

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