July 3, 2009
Dear Valued Client,
For many of us, July 4th is the official beginning of summer. It also marks the halfway point of the year. We want to take this opportunity to share some thoughts about the financial markets today.
Where we are today
If you asked forecasters in early March about the prospects for the economy, you would have heard some very dire predictions – this was when the conversation about the possibility of a depression was at its loudest. Although we still face significant challenges and there’s no shortage of negative forecasts, the consensus view is that the worst is most likely behind us. At Condor, we subscribe to this view.
- News on job losses and corporate earnings has been weak, but it appears that global economies have generally stabilized. Since the market bottom on March 9, the stock market has rallied by about 40% and municipal and corporate bonds have also rebounded significantly, leading the second quarter of 2009 to be the best quarter in six years. It is important to remember that unemployment is a lagging indicator and will continue to rise even into the recovery
- Consumer and business sentiment has shown modest improvement and some important economic indicators have gone from negative to neutral, and in some cases positive. Much has been made of the so-called “green shoots” pointing to early signs of recovery.
- While businesses are still cautious, access to lending has improved and we are seeing some positive prospects for a resumption of economic growth. Even in the face of worsening global growth projections from the World Bank, the current forecast is for the U.S. to exit its recession in the second half of this year, and for modest growth in 2010, followed by a return to stronger growth in 2011. This feeling was reinforced with the upgraded, positive views on the US economy by the International Monetary Fund, who interpreted a recent increase in Treasury yields as a positive sign that the fiscal stimulus was “reducing fears of really serious negative outcomes.”
Reasons for caution
Having said that the worst appears to be behind us doesn’t mean we won’t see continuing challenges in the economy and financial markets. Perhaps our position can best be described as “cautiously optimistic.” Here are some of the things that make us cautious:
- Consumer spending, which fuels 70% of demand in our economy, is hurting as a result of increased savings rates in response to declines in stock markets and house prices. Reducing consumer debt is positive long-term, but limits growth prospects in the near-term.
- Our housing market is still a mess, with 20% of mortgages in the “upside-down” category, where the mortgage exceeds the value of the house. The housing market may have bottomed, but it will take some time for the housing market to work through this.
- Many of you have read about “deleveraging” by businesses and financial institutions - this is a fancy word for reducing debt. While decreasing debt levels will increase stability and minimize downside risk, it will also limit upside potential.
- With the global economy still operating well below capacity, many companies will struggle for revenue growth and will also be facing pressure on margins; this will inevitably hurt profitability.
- The government is funding stimulus spending with record issuance of new debt and budget deficits. At some point, this will have to be repaid – and also runs the risks of fueling inflation down the road.
Why we’re optimistic
While these challenges are real, we believe they are fundamentally manageable and that they are outweighed by the positives. We don’t believe anyone can predict market movements in the short-term – instead we try to focus on the long-term prospects for the economy and markets. When we do that, there are numerous reasons for optimism:
- The coordinated action by central banks and Governments around the world appears to have stabilized the economy and prevented the precipitous decline that many had feared. We’ve never seen the level of international cooperation on the economic front that exists today. In fact, I feel that economic growth will sneak up on us quicker than some are forecasting as consumers slowly start to come out of their shells, especially when combined with the various government stimulus initiatives.
- Some of the extreme fears about the banking system have dissipated. The stress tests of bank balance sheets gave most banks a clean bill of health and some have started repaying the funds they received earlier this year (although these stress tests also highlighted continued problems with a few large financial institutions). The global financial system is undergoing a major makeover, which will lead to a more efficient, better-regulated financial system.
- Many of the building blocks that led to optimistic forecasts a year ago are still in place – the impact of technology on productivity and higher profits, record levels of research and development around the world, the emerging middle class in China, India and other developing countries, continued growth of trade and the global move to open markets.
What we’re recommending today
In recent conversations with clients, the number one question relates to the short-term outlook and whether any changes should be made to the portfolios as a result. There can be little doubt that the markets and investor sentiment are impossible to predict over the short-term. As evidence, we point to the sharp market rally since early March when fear and pessimism seemed to peak. We expect continued volatility and headlines that will cause alarm. As a result, we recommend creating and maintaining balanced, diversified portfolios – one of the important lessons from 2008 was the critical importance of diversification.
Depending on the size of each client’s portfolio, goals, and risk tolerance, we may utilize one or more of our investment strategies using individual stocks, individual bonds, mutual funds, exchange traded fun ds, or even our new distressed real estate fund. As always, we will continue to reposition the equity and fixed income portions of client accounts into areas where we see the most opportunity, while simultaneously keeping the accounts well diversified to avoid taking undo risk.
On behalf of the staff here at Condor Capital, I would like to personally thank you for your continued business and referrals. We take great pleasure in helping you, your friends, and your family in reaching your financial goals and objectives. Please be on the look-out for our brand new redesigned brochure, which was sent to you today to share with your friends and family. You may also see a PDF version of the brochure, as well as more information about Condor on our website www.condorcapital.com. Our brochure can be found by selecting the "Our Firm" option once you visit our website. Please contact our office if you would like to schedul e an appointment to review your portfolio or any financial planning items. We wish you all a happy and safe summer.
Sincerely,
Ken Schapiro
President
Condor Capital Management
