As the second quarter comes to a close, global stock markets have traded in a narrow range and the Wall Street swindler, Bernie Madoff, has been sentenced to the maximum sentence of 150 years in jail.

Though many investors have expected a correction after the significant rise in stock prices from the March 9th lows, stocks have simply traded sideways after reaching a peak in the first week of May. This is a significant development – a sign that stock markets are quite resilient and may be discounting better news ahead about the health of global economies. Our research suggests that the current global economic recession may end within the next few quarters, signifying that the bulk of the stock market decline may be behind us and that this spring’s stock market strength may have been the beginning of the long awaited recovery. There are record amounts of cash on the sidelines as institutional investors have been unwilling to invest aggressively. This institutional cash hoard could drive stocks significantly upward in coming quarters as economic fundamentals continue to heal. Instead of corrections of absolute price in stock indexes (such as 5-10% declines), we may experience corrections of time (where stocks prices do not decline much but trade sideways, as they have recently) before once again advancing.

In anticipation of a global stock market recovery, we have been purchasing stock for you in phases over the past two quarters. We will continue in this mode and may increase, or reduce, our pace given economic fundamentals. Also consider that we continue to use tools to manage the risk of your portfolio, including your overall asset allocation, sector exposure and the use of stop loss orders. Keep in mind that we do not apply stop losses to your entire portfolio, only on those companies that we believe would be vulnerable to further economic deterioration. Additionally, we are careful not to place our stop losses too close to current prices in an effort to avoid selling great companies in a period of normal volatility.

We want to take this time to remind you that – given the structure of our relationship –you are immune to a Bernie Madoff type scenario. First, your assets are held in your name at an outside custodian thus we simply have the ability to place trades in your account on your behalf. Additionally, our investment style is what we describe as “organic” – we purchase individual stocks, bonds and, when attractive, real estate investment trusts. We do not purchase esoteric investment products or send your assets to other managers or mutual funds.

We hope this update finds you well. If you have any questions, or would like to schedule a time to review your portfolio, please feel free to contact us at your earliest convenience.

Sincerely,

James E. Demmert
Managing Partner