Founder & Chairman
I’m not sure which is harder to believe, that summer is almost over, or that the stock market just continues to run in an upward direction? I suppose all good things must come to an end, but in both cases, I think the prudent course of action is to make every effort to enjoy what’s left to the fullest extent possible! And perhaps like Michigan summers, you never know whether it will end in August or October, so act like a boy scout and be prepared.
In January we began implementing a computer program to aid in the investment process. It’s a sophisticated tool, designed to help us indentify category leading trend growth investments, and simultaneously monitor, and if necessary, alert us to the potential for a significant decline in the market. By March, we had the tool fully operational and have been using it in our portfolio selection and management ever since. The program is doing exactly what we intended it to do. The trends haven’t changed much over the last three months, which is why we haven’t made any changes to our models. We hope it continues, but again, like a boy scout, we are prepared if it doesn’t.
One area of concern has been the bond market. On June 19th, Federal Reserve Chairman, Ben Bernanke’s comments during a news conference about ending bond purchases sooner that originally anticipated, sent interest rates soaring higher, and of course, stock and bond prices lower as well. Without recanting every word he’s uttered since then, those comments did change the environment for bonds fairly dramatically. Since then, Mr. Bernanke has done some back-pedaling, and the stock market has forgiven him by resuming it’s ascent higher. The bond market however, is apparently more sensitive and seems to be holding a grudge. While bonds have recovered a small portion of the initial loss, interest rates have remained much higher (on a relative basis, let’s face it, a 30 year mortgage can still be had for well below 5%). The 10-year treasury is still hovering right around 2.5% as I write this, and back in the beginning of May, it was sitting around 1.7%. That’s a big move for government bonds in such a short period of time. While things have simmered down, bonds have not come close to getting back to where they were in May. This is an area that we are paying very close attention to and we are weighing our possible alternatives.
Second quarter earnings were good, but not great, which is probably what is best for the stock market; just good enough to show some modest growth, but not good enough to induce the Fed to interrupt its stimulus support. We’ve been asked about the stay away in May strategy, and why we haven’t engaged in it this year. There are two reasons. One, the Fed has literally altered the investment landscape, and the old strategies simply aren’t working they way they used to. Secondly, with the algorithm in place, we have a sophisticated and effective tool at our disposal. The stock market has been very accommodative and bonds not so much.
We are not making any changes to the models at this time. That does not mean, however, that at any moment we won’t. The algorithm is up and running, and we are keeping a very close eye on the interest rate markets. Things have settled down for now, and typically the summer is a little slower as far as economic news is concerned, so we encourage you to enjoy summer’s last hurrah, maybe catch a Tiger game, they’ve certainly been fun to watch. It’s bad enough summer will eventually come to an end, what’s worse is we know about that time the Lion’s start playing football again.
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