Terry Sawchuk
Founder & Chairman
For a change, I am writing this newsletter from the passenger seat…no literally my daughter is driving the family car as we embark on our first trip to the east coast. We are somewhere in Ohio heading east on the turnpike on our way to Newport Rhode Island. So far so good, she’s keeping the car between the lines and it’s giving me time to write this update. It’s quite possible that the events of my current family vacation will be a little less exciting than the action in the markets over the coming weeks, possibly months as things are starting to get a little shaky. From European debt problems to our national debt ceiling, to rising unemployment and a weakening economy, there are a number of potential trouble spots on the radar.
The end of June brought a nice little pop in the equity markets across the board, coming on the heels of a multi-week swoon, netting us about a 6% rise for the year, all coming in the last 5 trading days of the quarter. All in all, the risk of being in the market didn’t really pay off as we are mired in a sideways trading range. One of our research providers astutely pointed out that the run up in equities was more than likely attributable to institutional buyers trying to pad their month and quarter end returns, commonly referred to as “window dressing”. A closer look revealed that trading volume was low and the retail investor was nowhere to be found. Generally speaking, most hedge fund managers and retail mutual funds haven’t been able to generate much of a return this year, in spite of the massive government stimulus package known as “quantitative easing”. Speaking of QE, it has officially expired, out with a whimper, at least for now.
Taking a look at the bigger picture, the market likely will experience an increase in volatility, in our view, with the next big move more likely down than up. Second quarter profit results should be decent as they were achieved during the last phase of quantitative easing which provided a favorable investment environment, but has since expired. We will, at least for now, begin to learn what investing in a world without overt government intervention looks like. The other predictable market mover could be the resolution of the debt ceiling in August. It seems very unlikely that it won’t be extended and increased, but along the way things could get a little bumpy. The market could react favorably to the news of the resolution of the debt ceiling, but beyond that it’s likely the staggering economy will ultimately push things lower. We will look to use that move as an opportunity to move back into very specific areas of the market.
I’m happy to report that my family and I have made it safely to Newport and it is quite a lovely place. Tiffany did an excellent job driving the family chariot, but was a less gracious co-pilot offering plenty of unwanted analysis of my driving skills. Needless to say, after 13 hours of “quality family time” we were all pretty happy to arrive. Surprisingly, Newport is less than packed. In speaking with the shuttle driver who has lived here for more than 30 years, this summer has been slow, too slow and he thinks it has more to do with the economy than the weather. I agree. This morning, the unemployment rate jumped to 9.2%, a number that will probably keep rising. Sadly, after over 2 trillion dollars worth of government stimulus, the one metric that is more important than any other, hasn’t really gotten a whole lot better. Meanwhile, the currency we all use to trade for goods and services has been watered down and we are all a little poorer as a result.
Speaking of poor, if you really want to feel like you don’t have much, take a stroll through the Breakers, the 70,000 square foot “summer cottage” the Vanderbilt’s built here in Newport back in 1895. It only takes an hour to tour, by the end you might be glad you never lived there, really who wants to clean 70,000 square feet anyway. Amazingly, after being the richest family in America at one time, it’s estimated that the Vanderbilt’s (who were richer in current money than Bill Gates, by a lot) are nowhere to be found on today’s Forbes 400 list. Just goes to show you, making it sometimes is easier than keeping it. Just look at the stock market in the first half of this year, through 5 months and 3 weeks, the markets virtually made no money, and in 5 days they shot up over 5%. Not worth the risk, as already the markets are starting to give it back.
If you’re wondering what our next move is, we have several opportunities on our “watch list” right now. We are keeping an eye on emerging markets, various food-based investments, and platinum among just a few areas. There are others as well. We are looking for investments that have favorable long-term demographic, political and economic tail winds. It then simply becomes a function of price and timing, and sometimes you have to be a little patient. In the meantime, we don’t see the benefit of taking on much market exposure as the volatility will most likely continue, and the trading range could remain narrow, at least for a few weeks, if not longer. In our view, the next likely move is down, so for now it just makes sense to hold the course and wait for the buying opportunity to come to us. We think the problems in the Euro will continue, making the U.S. dollar and U.S. Treasuries a surprising beneficiary of cash inflows due to a flight to quality. Furthermore, we think interest rates are likely to remain low, which makes bonds still a decent place to be. It’s hard to imagine interest rates moving much higher in the face of a very clearly slowing economy, and rising unemployment. In the ever-so entertaining game of chicken being played by President Obama and the Republicans, it seems more likely to us that the President will be more likely to bail, paving way for an ultimate increase in the debt ceiling. The caveat here, is that we may be giving too much credit with respect to the intelligence of the parties involved, and if our assumptions are incorrect, we could see an immediate jump in interest rates on government debt, and that would force us to reconsider our portfolios. Only time will tell, and we will be watching very closely.
As for me, it’s off to a surfing lesson with my daughter Ashley, and her friend. My main objective is to stay upright for as long as I can, avoid being the punch line of their jokes and stay off the lunch menu of some seriously big salt-water fish. Wish me luck.
Best regards,
Terry Sawchuk
Visit www.sawchukwealth.com to review past issues of The Market view.
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