National Securities & National Asset Management
Written by Allen G. Oechsner
s we mentioned in our prior update, we believe Chairman Bernanke and the efforts of the Federal Reserve Bank to stabilize the financial system have helped significantly to contain the credit crisis on the broader economy. The downside risks to the economy have eased as the Fed and monetary policy flooded the system with liquidity and investors’ confidence has, as a result, improved. Before considering aspects of the past quarter from our view, we would like to include here a summary of Mr. Bernanke’s speech on semiannual Monetary Policy to Congress:
“Better conditions in financial markets have been accompanied by some improvement in economic prospects. Consumer spending has been relatively stable so far this year, and the decline in housing activity appears to have moderated. Businesses have continued to cut capital spending and liquidate inventories, but the likely slowdown in the pace of inventory liquidation in coming quarters represents another factor that may support a turnaround in activity. Although the recession in the rest of the world led to a steep drop in demand for U.S. exports, this drag on our economy also appears to be waning, as many of our trading partners are also seeing signs of stabilization. Despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise. Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook...FOMC participants generally expect that, after declining in the first half of this year, output will increase slightly over the remainder of 2009. The recovery is expected to be gradual in 2010, with some acceleration in activity in 2011. Although the unemployment rate is projected to peak at the end of this year, the projected decline in 2010 and 2011 would still leave unemployment well above FOMC participants’ views of the longer-run sustainable rate. All participants expect that inflation will be somewhat lower this year than in recent years, and most expect it to remain subdued over the next two years.” (Briefing.com 7/21/09)
The markets continue to be marked by large swings in sentiment but in March sentiment clearly improved as the economy showed signs of stabilization and the frozen credit markets began to thaw. Market participants became more comfortable holding riskier assets. As an example, financial company shares were among the best performing sectors in the past quarter despite still questionable near and long term profit growth. Additionally, the most volatile market sectors in the first quarter, such as emerging markets and commodities, including oil, were among the leaders in terms of market returns in the most recent quarter.
The stocks of companies hit hardest by the recession, often the ones with the weakest balance sheets, rose dramatically in the second quarter. What is truly interesting is that in one of the best quarters in years, in terms of market performance, companies with leading margins and profitability, great balance sheets, and dividends covered by real earnings generally underperformed the markets as measured by the S&P 500.
Where then do we see the markets going forward? We continue to believe the markets will remain volatile, but with the credit markets generally functioning again and liquidity increasingly available to businesses and consumers we feel that market volatility will be manageable. So we remain cautiously optimistic as we look to year end. The credit markets are not fully healed, with ongoing concerns from foreclosures, credit card defaults and losses in commercial real estate. Until proven otherwise, our emphasis will remain cautious.
The markets have come a very long way from the market low in early March, and further progress during the second half will require convincing evidence not only that the U.S. economy has stabilized but that economic activity will demonstrate more signs of strength by year end. Many Americans remain downbeat as unemployment continues to rise; home prices continue to fall and corporate earnings growth is still weak. Right now, payroll trends is the key variable, and continues to be weak.
Unfortunately, the markets each day continue to be heavily influenced by political considerations in Washington. Political risk in the domestic U.S. markets has now become a very critical and unpredictable variable for all investments. We are still concerned that additional government programs and disincentives will be unleashed before year end. If the focus is real jobs as opposed to social engineering, given 2010 is an election year, this could be a positive for stocks.
In summary, the U.S. economy is expected to slowly come out of the recession as we move into the final quarters of the year. However, the sheer magnitude of the ongoing deleveraging process here in the U.S. and worldwide presents a moderating tone to this outlook. The deleveraging process is not something that can be worked out in a short period of time. History does show us that markets generally bottom before the economy shows meaningful signs of recovery. Our focus is to remain patient and focus on investments that have sustainable income characteristics. We will continue with this program until such time as we see better signals that the economy is recovering.
We generally favor maintaining positions in large companies that have leading competitive fundamental positions within their industries with the following attributes: global footprints, strong financials, strong organic growth in their product portfolios and, most importantly during this period, pay good sustainable dividends. These companies should be less vulnerable to large earnings shortfalls given their diverse business lines and international exposure. In this market environment, we believe you have to maintain a strong focus, discipline, and patience as total return (appreciation & income) long term investment investors.
By Allen G. Oechsner, National Asset Management, the MF Group/National Securities.
We are a branch of National Securities Corporation. Member FINRA/SIPC. Securities offered by National Securities Corporation. Investment Advisory services are offered through National Asset Management, Inc. a Registered Investment Advisor and an affiliate of National Securities Corporation. Client accounts carried by: 1) National Financial Services LLC. Member FINRA/SIPC. 2) Pension Financial Services Inc. Member FINRA/SIPC. National Asset Management, Inc. (“NAM”) is a registered investment advisor with the Securities and Exchange Commission. NAM provides fundamental investment management services to investors. The views expressed contain certain forward��looking statements. NAM believes these forward looking statements to be reasonable, although they are forecasts and actual results may be meaningfully different. Actual events may cause adjustments in portfolio management strategies from those currently expected to be employed. This material represents an assessment of the market at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any security in particular. No representation is being made that any investor will or is likely to achieve profits or losses. Diversification cannot prevent a loss or guarantee a profit. Index returns are for illustrative purposes only and do not represent actual securities performance. Past performance does not guarantee future results. One cannot directly invest in an index. Index performance returns do not reflect any management fees, transaction cost or expenses. Indices are unmanaged. S&P 500 Index: The Standard & Poor’s 500 (S&P 500) is an unmanaged, capital-weighted index representing the aggregate market value of the common equity of 500 companies primarily traded on the NYSE. You cannot directly invest in the index. Nasdaq Composite Index: http://www.investorwords.com/2995/market_value_weighted_index.html http://www.investorwords. com/986/common_stock.html http://www.investorwords.com/2843/listed.html http://www.investorwords.com/3189/Nasdaq.html Dow Jones Industrial Average (DJIA) : Measure of the performance of the collection of 30 “blue-chip” stocks traded on the New York Stock Exchange (NYSE), considered the leaders of the market.
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