• On July 29th, a weaker than expected jobs report signaled that the U.S. economy was slowing more than had been expected and that a robust recovery was not imminent.
• The following week, the U.S. Congress finally voted to raise the debt ceiling, after weeks of shamelessly posturing for their constituents and driving the country to the brink of default.  Almost as a response, Standard and Poors downgraded some U.S. debt.
• Later that same week, European politicians and officials continued to dither publicly on what actions to take to contain the Greek debt crisis and "ring fence" Spain and Italy, two economies that are truly too big to fail.
• Finally, in mid-September, Fed Chairman Ben Bernanke uttered three words about the U.S. economy that were already obvious--that there were "serious downside risks" to it. 

The cumulative effect of all of these events was to undermine investor confidence in governments' ability to stimulate their economies in the short term and reduce their debt levels in the long term.

With this loss of confidence came an aversion to risk so extreme that investors sold anything that smacked of it, hoping to get out of the way of further declines.  Risk was "off" for any security other than a U.S Treasury bill, note or bond. While much of the fear was well founded, the selloffs were excessive and, in many cases, unrelated to the fundamental values of the assets sold.  It bears reminding that you are invested in securities, not in countries, their governments, or their economies.  Capital markets quantify the prices of securities.  When fear leads to indiscriminate selling, the pricing mechanism breaks down and price becomes divorced from value.

In the past, such periods of panic have provided buying opportunities for savvy investors, though there is no guarantee that the current period will provide them.  However, the most respected investor of our time, Warren Buffet, committed $4 billion to common stock during the third quarter and the board of Berkshire Hathaway authorized him, its CEO, to begin buying back shares of the company, so low had their price fallen.  He observed the growing earnings of the seventy companies that Berkshire wholly owns and concluded that the U.S. would not fall back into recession. 

Many of the experienced managers to whom we have entrusted your money are also seizing the moment.  They are not allowing the latest headlines to obscure or distort their long term views of the global economy or their expectations for the companies whose securities they purchase.  They buy when others are fearful in the hope that they can sell when others are greedy.  They are bolstered by the knowledge that corporate balance sheets and earnings are strong and by the confidence that the demands of emerging middle classes in emerging economies will eventually lift the global economy out of its malaise.

We have been in a period of "unusual uncertainty", in the words of Chairman Bernanke, for much of the past three years, in unchartered waters facing headwinds we have not seen in generations.  This uncertainty has resulted in trendless markets that are treacherous in their volatility, in sentiment shifts that are sudden and severe, and in our being left wholly dependent on policy makers and politicians.  Yet we firmly believe that the ruling classes around the world will be forced by those they rule to solve the problems that they have largely created themselves and that well-run corporations will find ways to prosper in whatever contexts those governments create.

I know that the money you have invested through our firm is not money that you can afford to lose.  I am invested alongside you in most, if not all, of the securities you own, so I experience the same apprehension when prices swing wildly and the same disappointment when they decline.    I appreciate the patience and persistence you have shown in these tumultuous times and am confident that you will ultimately be rewarded for them. We will continue to work hard to make prudent decisions on your behalf.

As I close, I want to make an important comment about emotional investing. We are all humans and do feel good when our account values rise and feel bad when our account values decline. The study of investor behavior teaches that investors make predictable mistakes, based on human nature. Markets move in cycles, and often the best time to invest or stay invested may be when you feel most uncomfortable doing so. We do our best to make sound investment recommendations for you based on data and not emotion.

Remember, it is better to follow a disciplined investment process that is non emotional, disciplined, and systematic rather than according to one's emotions. Keeping sight of our long term goals of funding college expenses or generating retirement income requires patience, perseverance and a good game plan.

If you want to discuss how your portfolio is positioned to meet the challenges that lie ahead, don't hesitate to call.  We are always happy to speak with you.

Sincerely

 

 

Steve Van Houten, CFP®

President

LPL Registered Principal

CA Insurance Lic#0613686