First Quarter 2011 Review“Common sense is not so common.” What would average investors have said back on New Year’s Day if the following question was posed: “Where will the Dow Jones Industrial average finish after the 1st quarter, given that oil prices will surge 24%, Portugal’s government will shut down and require a bailout, civil unrest will spread throughout North Africa and the Middle East, Japan will experience a devastating earthquake and tsunami followed by a nuclear crisis, both the U.S. housing market and the U.S. dollar will continue to weaken, and the U.S. deficit will exceed $14 trillion?” Most would not have predicted that the Dow Jones would have its best 1st quarter in 12 years with a 6.74% gain. The actual result is yet another reason why LCM Capital Management is not in the short-term market timing/market guessing game. In spite of these global occurrences, most major indices had large gains this past quarter. The S&P 500 rose over 5%, the EAFA International Index jumped more than 3%, and both the Mid-Cap 400 Index and Russell 2000 Small-Cap Index appreciated in excess of 7%. The U.S. Treasury market was relatively flat for the quarter, which confounded the majority of “experts” by and large. Volatility continued this past quarter. In March, 57% of the trading days saw triple-digit price movements for the Dow Jones Industrial, and because of this, LCM Capital Management adheres to remaining diversified across many asset classes for its clients. This traditionally produces less volatility, while reducing risk within the portfolio. Moving forward, we still believe in our jobless recovery with a slow to moderate GDP growth scenario (2% - 3%). Housing will remain sluggish for a prolonged period and the consumer will continue to labor while attempting to reduce their debt levels. Although household debt has fallen roughly $500 billion from March of 2009, virtually all of that can be attributed to lower mortgage debt. Credit card debt has stayed steady at $2.5 trillion, while U.S. household wealth has dropped by more than $10 trillion. Remember, the consumer is 70% of our economy, and while their debt-to-income ratio has dropped from 130% in 2007 to 118% today, it still will need to drop by over 30% to bring us back in line with our historical average of 80%. With tax rates on the rise and over 9% unemployment, it is hard to imagine our economy expanding to the extent most economists are predicting. Six years ago, LCM Capital Management espoused the “slow and steady” approach and sees no reason to alter this belief. This is why keeping investment costs down will benefit all of our individual and institutional clients over the long-term. Interest rates should remain low for the foreseeable future and we expect QE 2 to end in June. This will create more volatility, but is necessary to wean ourselves from this cheap money policy fix. While on the surface many things seem to be plaguing our society and economy, we at LCM Capital Management, much like Voltaire, prefer to keep it simple. The simple truths are:
These solutions require simple common sense which unfortunately is no longer common. Staying diversified across major asset classes, while procuring insured high-grade municipal bonds, along with inflation protected treasuries and CD’s when priced appropriately will continue to be the focus of LCM Capital Management. We thank you for the significant number of referrals we have received, as well as your continued trust and business as we build the most transparent, low-cost, fiduciary-focused private money management firm in the country. LCM Capital Management The view expressed reflects those of the authors as of the date of this commentary. Any such views are subject to change at any time based on market or other conditions, and LCM Capital Management (LCMCM) disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for LCMCM are based on numerous factors, may not be relied upon as an indication of trading intent on behalf of LCMCM. Thoughts about investing, the direction of the market, and individual securities are based on the author's own analysis and are not representative of actual future performance. Investing involves risk including the possible loss of principal. |