NEWS

2012-01-06 :: 2011 4th Quarter commentary
Quarterly commentary as of 12.31.2011

Looking Back

Investment historians will not remember 2011 for its performance, but as one of the most volatile years in memory. If it were not for dividends, the S&P would have ended the year flat. Only large cap U.S. stocks produced a positive return for the year. Every other sector was negative, with the biggest losers being Emerging Markets and International Stocks. We predicted the economic environment would be slow. Global stock markets were continually rattled by negative headline news.

Fixed income had another good year as safety helped bid up prices even further. Fear gripped the globe and movement towards the safe haven of debt continues to be appealing.

Absolute return hedge funds did not have a great year. They did their job in that they tempered the down periods but they did not gather the upside, and most funds ended the year in negative territory.

Real Estate: Some markets have shown some resilience and rebounded a bit but not enough to demand any major investment opportunity. Residential housing continued to bounce along the bottom. We expected this to be a long and painful process since our 2005 commentary. Residential housing will remain relatively stagnant until the demographics shift in our population. The Commercial Sector, while more stable in 2011, did not do anything exciting. The Rental Market continued to do well, but this should level off as well. The Retail Mall Sector saw some positive movement but we think this is temporary as brick and mortar continue to lose to the internet.

Commodities Gold, metals and energy put in a decent year but pulled back at the end of the year as the U.S. dollar rallied, making all commodities cheaper.

2011 YTD (Total Return)

Russell 1000 1.50%                     Mid-cap -1.55%                            Russell 2000 -4.18%
Russell 1000 Value 0.39%         Mid-cap Value -1.38%                  Russell 2000 Value -5.50%
Russell 1000 Growth 2.64%     Mid-cap Growth -1.65%                 Russell 2000 Growth -2.91%
MSCI EAFE -14.82%                     MSCI Emerg Mkts -20.41%         S&P 500 2.11%
 

Looking Forward

Equities: We have not changed our longer term perspective (5-10yrs) of low to moderate single digit returns in the equity markets. Our economy will have growth but it will be tepid for quite some time. This year should be a replay of 2011 with many similar themes reoccurring. 2012 is an election year, which usually bodes well for the stock market, with an average historical return of over 9% during elections. Unfortunately, that does not always work out, as we saw in 2008. There are still many problems for the markets to overcome as the European debt crisis has not gone away. The United States finances are not getting any better, as we are approaching the debt ceiling again. Non-US markets should rebound a bit this year as valuations are low, but we favor Emerging Markets rather than European markets. This year will probably be as volatile as last year with many ups and downs. Our belief since 2010 in large dividend growth and dividend value along with stock buybacks has come to fruition and will continue in the future.

Fixed income markets The 10 year treasury yield below 2.0% shows that the U.S. is still considered the safest game in town, however this will eventually change. We do not see the big upward movement in interest rates happening this year. As of this writing most of the leading economic indicators do not support a recession. In this kind of environment, bonds are a relatively safe investment, but the duration of the bond should remain relatively short. The municipal bond market is looking more attractive (on an after tax basis) than the low yields of taxable bonds. We continue to believe higher credit quality with shorter durations is the safest play.

Commercial & Residential Real Estate There continues to be no change to our forecast in real estate: It is simply going nowhere for years. Even with low interest rates, demand has not improved significantly. Please refer to our previous commentaries starting from Q3 2005. We think multiple unit rental properties are one of the few places to be in real estate. As for commercial real estate, we continue to be flat on office space and negative on the retail sector.

Absolute return hedge funds will probably have a good year and outperform bonds for the first time in many years. Most institutional investors have pledged more money into this space as safety is on the minds of most investment committees.

Commodities will have a good year in most spaces. Energy will probably do best, even though we had lower demand last year, prices did not fall. If significant growth or geopolitical risks materialize, oil could move much higher. This would put pressure on disposable income and hurt corporate margins. Precious metals will do well if we do not address our deficit issues.

This will be another volatile year with equities up slightly, the ten year treasury relatively flat and commodities doing well. If countries around the world will get their financial and political houses in order, we would expect a very good year in all equity markets.

Have a wonderful Winter !!!!