3rd Qtr Portfolio & Market Observations 2011

We are cautiously optimistic about the market. Presently we are stuck in a trading range of 10,000 to 12,500 on the Dow. Depending on the news of the day the market goes up one day and down the next. We are seeing extreme volatility due to the trading activities of short-term traders and speculators. When the market breaks out of this trading range we believe it will be on the upside, but it could take as long as six to twelve months.

Given this scenario we are adding more income yielding securities to the portfolio, both dividend and interest income. While we wait for the market to go up we are getting paid a good income return. Some may ask why not get out of the market and wait? Because raising cash and letting the money sit in a money market fund earns nothing. While the portfolio may be more volatile we believe investors will be well rewarded.

Market Commentary

2011 has been nothing short of a global roller coaster ride. We started with a strong first quarter which only helped bolster what was a flat 2nd quarter. The true test was the 3rd quarter in which the market experienced the sharpest decline since early 2009 when we were in the throes of the global financial crisis. It was difficult for stock investors, not only because of the double-digit decline in the major market indices, but also because of the unprecedented volatility due to a greater sense of uncertainty both in the political and the economic landscape. Unfortunately, the severe swings in stock prices have revived memories of 2008 – 2009 among many investors. Sovereign debt worries in Europe and a downgrading of growth forecast for the global economy coupled with a slowdown in China and mounting talk of a double-dip recession has fueled investor anxiety.

2011 Market Performance

Market Performance 2011

Despite the fear and malaise of the first three quarters, market data actually indicates a fairly stable U.S. economy, albeit far from flourishing. Our economy and financial system are in no way near the dismal conditions we saw in 2008 when the system was in risk of financial collapse. We are seeing this in the corporate positioning of companies. Corporations have increased the efficiency of their operations. They have not only reduced debt but have increased their cash holdings significantly. Even with the slowdown in the economy, companies are still producing record earnings. Earnings for the S&P 500 are projected to be over $100 this calendar year and dividends are projected to be $25.

So that is what’s behind us, the key question is what is ahead. There are real challenges for the U.S. economy; primarily the uncertainty of the economic landscape in the U.S., and abroad, and the inability of our political leaders to reach any type of consensus. We need the leadership and political will to take the important steps to implement change.

Nowhere is the need for consensus more prevalent than in the creation of jobs and the sagging housing market. Mortgage rates are at their lowest point in 50 years and still the real estate market continues to fall. This is because it is not lower interest rates that drive people to purchase homes, but rather, the security of employment. People need to know their jobs are secure enough to help them get past the fear and to give them the “comfortability” to make a large and long term purchase. Political leaders need to focus on the creation of new jobs, but they also need to work with the private sector to accomplish such a challenge. Government initiatives alone are not enough. The strength and innovation of the private sector is what has helped America in the past and will be essential to any lasting economic recovery. Focus on the creation of viable employment and housing will slowly follow.

There have been questions about the role of the U.S. in a global economy. America is the largest exporter of goods in the world. The U.S. is still the economic engine that drives the rest of the globe, and will continue to do so in the future. Other countries are growing faster and becoming more competitive with us, but remember, they are starting from a much smaller base. History has shown that the underdeveloped countries of the past forty years can grow with the help of the United States and our resources. Over time, their growth will only help our economy by creating markets for our higher (and more profitable) technology goods.

The U.S. will adapt to functioning in a world economy. We are the largest and perhaps the most innovative economy in the world. The United States has the economic, the political, and the legal constitution to have the flexibility to solve these issues. Solutions will come. As some observer of American culture said: “America will always do the right thing after they have exhausted all other possibilities.”

September 30, 2011

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