Third Quarter 2009 Review“Things in life should be simple rather than complex.” LCM Capital Management has applied this principle to managing our clients’ assets for many years. Given the events that have unfolded over the last two decades, more people on Wall Street should take heed. The 3rd quarter did not disappoint the bulls, raising virtually all sectors, unlike last quarter, which saw a huge sell off in fixed income assets. Both the Dow and the S&P 500 gained 15% last quarter, their best quarterly performances since 1998. The Small Cap Russell 2000 added almost 19%. The Mid Caps jumped by 19% and the EAFE International rose over 18%. These impressive and welcomed gains were mostly driven by the riskiest sectors within the markets. Financials, as an example, were up 25% for this quarter. Emerging markets have been on an absolute parabolic move with Russia up 109%, Turkey 86%, Hungary 73%, Brazil 65% and China 51% year-to-date. While LCM Capital Management believes we have seen the worst, consumers both here and abroad remain hobbled by debt, growing unemployment and declining home prices. This flies directly in the face of financials, their spectacular performance and the developing markets’ frenzied ascension. The high risk trade scenario also held true for the fixed income markets. The safest sector, treasuries, rose by 2%. Investment grade corporate bonds rallied over 8%, but the best performing sector within fixed income was high-yield junk bonds, which increased by over 15% and are now up 48% year-to-date. This typically happens when investors become comfortable and are faced with little or no interest on their money market funds or U.S. government debt. As a result, investors begin to “stretch” for yield. Historically this type of massive money flow ends badly for investors. Case in point: money market fund holders ($3.5 trillion) for the quarter plowed $131 billion into bond mutual funds, the highest levels ever seen – EVER is a long time. Parts of these massive moves substantiate the statement made by LCM Capital Management in our first quarter report. We noted that analysts had to reduce their overly optimistic earnings expectations before the markets could move higher. This occurred throughout the first half of the year and as a result corporate profits handily beat drastically reduced forecasts. These corporate profits were due in large part to cost-cutting. Longer term, we will need to see some top line growth in order for the markets to build upon and support their rebound. The larger part of the global “reflation” move is due to the burning U.S. dollar which, when measured against its most significant trading partners, is down over 16% from its 2009 high. In fact, the U.S. dollar is getting perilously close to where it was when Lehman Brothers collapsed (71.49), the lowest price it has ever seen – EVER is a long time. What this slow dollar devaluation means is that debtors (bankers who borrow from the fed at zero) get paid, while creditors (China, money market/passbook savings investors and consumers) foot the bill. Bank money market rates are at virtually ZERO while 6 month t-bills are yielding .15%. In other words, the U.S. government will guarantee you double your money in 667 years. Housing had a slight rebound as auctions moved some inventory of bank owned real estate (foreclosures). The first-time home buyer $8,000 tax credit helped. Unfortunately this government sponsored stimulus program will take buyers out of the 2010-2012 market. Interestingly, rental and homeowner vacancy rates hit the highest levels ever seen– EVER is a long time. In 2009, the U.S. Treasury has issued (including 4th quarter estimate) $1.5 trillion in debt. Twice that amount is projected for 2010. This is the greatest amount of debt issuance the United States has ever seen – EVER is a long time. Ultimately, what all of this means for our clients is higher inflation and much higher taxes across the board. According to the International Monetary Fund (IMF), U.S. Government debt could reach 85% of annual economic output by 2014, up from about 58% today. The U.S. taxpayer, from federal, state and local level, will foot the higher debt burden from income tax hikes to parking meter increases, another reason high quality municipal bonds and inflation protected CD’s will continue to be the top choices in fixed income at LCM Capital Management. Quality stocks with lower debt levels should continue to perform well since they act as an inflation hedge. Residential real estate still overvalued, will flounder nationally, and will not be a hedge against inflation. The commercial real estate market bears continual monitoring as well. High yield bonds (junk) are to be avoided as many of these companies will go bankrupt. The economy will continue to plod along with higher than normal unemployment, as corporations adjust to new levels of taxation. With the potential for a jobless recovery, everyone will try to keep more of what they earn. There are many questions still to be resolved. For these reasons, LCM Capital Management will continue to stay diversified across many asset classes, and avoid higher risk investments at the “cost” of short-term performance. As always, controlling cost and adhering to your stated risk tolerance will be extremely important moving forward. A person would be hard-pressed to sell anyone on why they should use a retail broker or bank as they have lost over a trillion dollars and required $800 billion of taxpayer money to stay in business. Their fees will explode. In aggregate, they have become extinct. We remain positive about the long-term and look forward to many new, strong and innovative companies that will undoubtedly emerge from this time in our history. Thank you for your continued trust, business and referrals as we build the most transparent, low-cost, fiduciary-focused money management firm in the country. As always, should you have any questions please call us at (312) 705-3013 or email lcm@lcmcapital.com. 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. |