|
|
What we anticipate for Q3 and Q4 of 2007
- Continued weakness in housing markets and associated credit markets.
- Continued slower economic growth for the US and increased volatility for stocks.
- Relatively stable interest rates as Fed focuses on controlling inflation.
- Increased volatility in the Emerging Country Markets.
- Slower but stable economic growth for Developed International Markets
- A systematic "re-pricing of risk" throughout the global financial markets.
Anticipated Portfolio Moves:
- Maintain a generally neutral to defensive posture with all investment portfolios.
- Continue to reduce the maturities of our US Treasury bond investments.
- Slowly add to our investments in US large and mid-size companies, and slowly add to our investments in large-size companies in Developed International Markets.
- Consolidate our US growth and value investments into one "blended" investment.
- Continue to look for effective hedging strategies to reduce portfolio volatility moving forward.
US Economic Overview:
Our views for the third quarter of 2007 are all directionally similar to our second quarter views.
From an asset class perspective, we remain positive on stocks and negative on bonds, however the strength of our views has slightly moderated. The stock market has continued to rally surprisingly in the face of tangible economic concerns, and within the bond markets there have been some valuation adjustments to more accurately reflect differing levels of risk.
Within the US stock market, we favor mid size and large-size stocks more strongly this quarter and are now neutral between growth stocks and value stocks. In addition, we remain optimistic about developed international stock markets and are still shying away from any significant exposure to emerging stock markets as we feel that their continued strength only adds more risk to the asset class over the near term.
Within the bond markets, we are still generally negative across the globe as many international central banks have continued to raise rates. With our fixed income investments, we continue to invest exclusively in US Treasuries with short-term maturities.
Market Implications:
My sense remains that we are heading into a period of generally slower economic growth as the housing sector and associates credit markets continue to correct. This process may continue for some time and could spread to other asset classes before it has run its course. Volatility has begun to increase in the financial markets as investors are re-positioning their portfolios for a slower economy. In most cases, this means a "flight to quality" or specifically a move to companies with established businesses and reliable earnings, and to US Treasury bonds.
Opportunities and Risks:
We continue to see opportunities for growth in mid-size and large-size US markets, and in select markets within Continental Europe.
As you know from my previous "Market Outlooks", over the past couple of years we have preferred countries in continental Europe and have been particularly bearish on the United Kingdom. Our view on Japan has oscillated over this period; however, we have recently had an unfavorable outlook on Japan.
This quarter, we are once again most bullish on Germany and Switzerland and consider the United Kingdom and Japan to be the least attractive equity markets. We are positive on Germany and Switzerland due to strong momentum, attractive valuations and supportive macroeconomic conditions. Despite a favorable risk environment, we are negative on the United Kingdom as a result of poor recent performance and a less favorable economic environment. We are also negative on Japan given poor forecasted returns relative to investment risk.
This has been an interesting year so far as the financial markets have slowly begun to unwind some of the excesses that have developed in many asset classes over the past five years. What is unusual to us is that so far, the markets have begun to unwind these excesses in a relatively contained and methodical way, leaving entire sectors untouched and seeing many others continues on to new highs. We think there are likely more "valuation adjustments" to come within certain asset classes and we are doing our best to avoid those we feel are most vulnerable.
As always, please feel free to call me with questions at (858)350-1010.
Sincerely,
Craig P. Kelley Sean P. O'Hara
|
* Performance information stated above is for the one year time period, January 1, 2008 through December 31, 2008, from December 31, 2008 through January 31, 2009, and from inception, March 31, 2006 through January 31, 2009, as is indicated. Performance information is for Kelley Investments Managed Accounts Program where client accounts are managed on a discretionary basis. Not all accounts managed by Kelley Investments are part of the discretionary Managed Accounts Program. Performance information stated above does not pertain to any accounts that are not part of the Managed Accounts Program. Performance results for accounts that are not part of the Managed Accounts Program may differ significantly. Performance information quoted above represents past performance and is not a guarantee of future results. Performance information is quoted on a Gross basis and does not include deductions for management fees or trading expenses. If these fees and expenses were taken into account, performance would be lower. The investment return and principal value of investments in the Managed Income & Growth or Managed Growth Portfolios will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.
**For illustrative purposes only. It is not possible to invest directly in an index. Comparisons with the S&P 500® Index are not meant to be indicative of any of Kelley Investments Managed Portfolio strategies, asset composition or volatility. Given the wide scope of securities held by S&P 500, it should be inherently less volatile. Our results may differ markedly from those of the S&P 500 in either up or down market trends. The performance of the S&P 500 is shown with all dividends reinvested into the index and does not reflect any reduction in performance for the effects of transaction cost or management fees.
 |
|
|
|
|
Conference Call
To listen to a replay
of our
January 12, 2008 Conference Call, dial (877)471-6587
and enter Program ID 1038358075004#
|
Craig P. Kelley offers Investment Advisory Services through Kelley Investments, A Registered Investment Advisor. Client assets are held in custody at Fidelity Investments clearing firm, National Financial Services LLC (NFS).
|
|
