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The Eye of the Storm
In the last month the risk of a financial meltdown subsided due to 1) Fed liquidity measures, 2) aggressive recapitalization by several large financial institutions, 3) "headline" macro data beating expectations, and 4) fiscal stimulus in the form of rebate checks.
We expect consumer stimulus from tax rebates to be significant but short lived, and think that the economy is a long way from being out of the woods. Economic uncertainly is likely to persist as long as home prices continue to decline. Housing supply has reached record levels due to rising foreclosures and fewer first time home purchases. The supply glut is expected to push home prices down an additional 10% from current levels by the middle of 2009.
In this environment, we do not believe the Fed will raise interest rates anytime soon and will accept an uncomfortable level of inflation through 2008.
Overall we expect a mild economic recession, heightened volatility as many investments like real estate, mortgages and consumer debt re-price, and a slow but steady economic recovery in 2009 and 2010.
Preserving capital and delivering positive returns year after year are our primary objectives. Within your accounts we are continuing to take a steady and cautious path with approximately 70% invested in a 1 to 3 year maturity US Treasury Note Index and approximately 30% in the Blackrock Global Allocation Fund (MDLOX).
The Blackrock Global Allocation Fund has a long history of successfully navigating economic turbulence dating back to 1989, and is doing an excellent job so far in the current downturn. We anticipate adding to this investment in the months ahead.
Additionally, we anticipate making a new investment in the First Eagle Global Fund (SGENX) to further prepare for what we believe may be a substantial rally in stocks as the current crisis ends and the economy stabilizes.
First Eagle Global, like Blackrock, enjoys the freedom of investing in a wide range of assets anywhere in the world they are able to find value. And like Blackrock, First Eagle Global has done an excellent job at managing risk in all market environments.
While we have some concerns that the summer months could bring more weakness to the financial markets, we are starting to see more opportunities and fewer risks.
Please call us with questions at (858) 350-1010.
Sincerely,
Craig P. Kelley Sean P. O'Hara
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* 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.
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Conference Call
To listen to a replay
of our
January 12, 2008 Conference Call, dial (877)471-6587
and enter Program ID 1038358075004#
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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).
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