Third Quarter 2011 Review"We can easily forgive a child who is afraid of the dark. The real tragedy of life is when men are afraid of the light."
We at LCM Capital Management understand that we continually repeat ourselves when we say that volatility is here to stay, but our point is continually substantiated. At the end of last quarter, we added the bond market to our volatility expectation. The result - treasury bonds had an epic quarter with maturities over 10 years returning more than 23% to investors. The stock markets across the board remained as volatile as ever. In August and September, the Dow Jones rose or fell by more than 1% on approximately 70% of the trading days, while 20% of these days saw closing moves of more than 2%. This resulted in one of the worst quarters for performance ever with the Dow Jones and the NASDAQ dropping over 12%. The S&P 500 lost over 14% and the Russell 2000 Small Cap slid over 22%. The European and Asian markets were the worst performers with Germany, France, and Hong Kong all plunging more than 24%. While a somewhat painful quarter, the markets recovered 90%+ of those losses during the first few weeks of October. This should emphasize why LCM Capital Management does not attempt to time the markets. The uncertainty surrounding economic instability throughout the world will keep volatility high and economic growth modest. Earnings have continued to beat lowered expectations; however most of this is due to cost cutting and accounting adjustments rather than top-line growth. Eventually, there will be nothing left to cut, leaving corporations to show real growth. The EU will eventually need slow their summit meetings - 20 and counting for 2011 - and start offering real solutions with real results. This will not be popular, but change seldom is. Until they address their economic problems, the consequences of their indecisiveness will be devastating. Unfortunately, our elected officials are no better in making difficult decisions expeditiously, and with the elections of 2012 rapidly approaching, we find it difficult to believe that much, if anything, will be accomplished in Washington, DC. The consumer, representing 70% of the economy, will continue to be under pressure from real estate (both commercial and residential), higher taxes, high unemployment, and the eventual increase in inflation. This should result in choppy, slow to moderate economic growth. High quality municipal bonds will provide yield along with high quality stocks, and diversification across all asset classes will help keep risks contained. Plato correctly forecasted man’s inability to admit his mistakes and correct them. The collapse of the Greek Empire over 2000 years ago is repeating itself today. Politicians around the world must come to the realization that endless spending and bailouts resolve nothing. LCM Capital Management urges all clients, friends, and family to have us review holdings in mutual funds held away, especially bond funds, to ensure that high risk sovereign debt does not end as a Greek tragedy. 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, Inc. 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. |