Fourth Quarter and Year End 2011 Analysis
“In times like these, it is helpful to remember that there have always been times like these.”
- Paul Harvey
“Never make predictions, especially about the future.”
-Casey Stengel
At the dawn of a new year, in which nobody seems to expect good things, we should remember two unavoidable truths. First, nobody knows the future. Second, putting your money anywhere, even under the bed, involves a risk of some kind. So, when it comes to managing money in 2012, we should not attempt to predict the future but rather to reduce the year to some plausible scenarios and work out the rough probabilities of each. Then we can focus on what we do know is the primary goal when allocating assets, which is MANAGING RISK.
We are thankful about many things that occurred in 2011, and one of them is how successful we were in avoiding the volatility that pervaded the markets during the year. In the third quarter, the markets (S & P 500 and the Dow Jones) were off, top to bottom, between 16.86% - 17.86%, but L & S’s Growth and Income and Income portfolios were about flat. Missing that volatility sure helped us sleep better at night. Preserving capital is one of our important goals, and we succeeded in that during the year.
History suggests that stock markets can move sideways for a decade after a big crash. The nature of the recovery makes it hard to go into overdrive. Governments have borrowed to get through this period, and, if things improve, they will cut back. Central Banks have printed money; if things improve, they will raise rates. So, it is best to assume that 2012 will be like 2011, a side-by-side way year with many risks in response to political and economic developments while guarding against the risk that markets instead breakout emphatically for better or for worse.
Investors need income from somewhere, so investors are flocking toward stocks that pay a dividend and attempting to maximize high-yield for now. At this point, it would be wise to stay with companies with stable and growing dividends. These tend to be large and mature multi-national companies. It is these kinds of companies that we have chosen to emphasize in our current portfolio as we begin 2012.
We believe that tactical strategies will be crucial in 2012. Our present thought is that it will be important to maintain defensive strategies and minimize volatility and downside risk as well as to focus on positive secular fundamentals. We plan to focus on high-quality investments with preservation of capital, as always, a critical part of our strategy. In 2012, we hope to use the inherent market volatility that is part of every post –bubble deleveraging cycle to advantage by staying tactical, active, and opportunistic in our strategy. This will probably cause us to be more active than we (or you) might otherwise like during the year, but we feel that this will protect us somewhat from the uncertainties that still pervade the markets.
Stable income at a reasonable price. Diversified asset classes. High quality. These are the investment themes we see as critical as we begin 2012.
We are generally optimistic about 2012. During 2011, we had a wide range of concerns including structural unemployment and mounting fiscal balance issues both domestic and sovereign. We expected a foul mood to weigh on consumer and business confidence. Europe was poised for a dive, and we were concerned about domestic political issues. Looking back over the past five years and considering where we are today, we feel optimistic that the dark clouds may finally be breaking a bit. The positive economic momentum in the U. S., progress (however slow) in Europe, and the adoption of global policy accommodations may bode well for economic growth. We think the doom and gloom of the mass media is a bit overdone. Election years are always interesting, and, hopefully, the politicians in the U. S. will play together better in 2012 than they did in 2011. Please do not think we are being Pollyannas and are unaware of the risks we face and, of course, the possibility of an unexpected “black swan.” However, we do feel that the time for optimism may be when all you hear is pessimism.
For those who dislike the idea of starting 2012 with a bland portfolio dominated by dividend-yielding stocks or bond alternatives, there is room for a few so-called more aggressive positions, such as our energy emphasis. It would not be wise, in our opinion, to risk a large proportion of the portfolio in the more risky asset classes. However, to leave your money under the bed and risk missing out on opportunities (due to a change of circumstances) like a possible need to move into cyclical stocks would also not be prudent. This environment is good for those who can afford a skilled macro manager. We hope we can live up to your expectations.
Best wishes for a Healthy, Happy, and Prosperous 2012.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
The performance of DJIA and S & P 500 when shown is as a general market indicator only and should not be considered an appropriate benchmark for individual account performance; the management style for client accounts may utilize positions and strategies, such as covered calls, that are not reflected in the index. Indexes are calculated on a total return basis with dividends reinvested and are not available for direct investment.
