AMM - Q1 2010 Letter
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8/14/2019 AMM - Q1 2010 Letter
1/4
AMERICANMONEYMANAGEMENT,LLCSEC Registered Investment Advisor
POBox675203,RanchoSantaFe,CA92067 Tel8889991395 Fax8663641084 [email protected] www.amminvest.com
January 2010CLIENT NEWSLETTER
THE LOST DECADE (FORPASSIVEBUYANDHOLDINVESTORS)Thefuturehasawayofarrivingunannounced. GeorgeWill
2009markedtheendoftheworstdecadeforU.S.stocksinhistory. Overthisperiod,thepricereturnontheS&P500
(ChartA)was24.1%. Attheendof1999,fewhadpredictedthatthefirstdecadeofthenewmillenniumwouldoffer
suchmiserablereturnstopassive buy&hold equityinvestors. Itwasevenworseforpeoplewhoboughtandheldthe
mostpopularstocks(aftertheyhadalreadygoneupduringthe90s)onDecember31,1999.
Accordingtoanarticleon12/21/09byBrettArendsintheWallStreetJournal, themostwidelyrecommendedstocks
10yearsago,according toaquick surveyat the time in theWashingtonPostwere:AmericaOnline,CiscoSystems,
Qualcomm,MCIWorldCom,LucentTechnology,andTexasInstruments. $1,000.00 investedinthesepopular,widely
recommendedstocksonDecember31,1999hadturnedinto$291bytheendof2009. Thisisnotsurprisinggiveninvestorswillingness toextrapolate therecentpast inmakingdecisionsabout the future. Allof thewidelyrecommended
stockslistedabovehadexperiencedmassivereturnsbytheendofthelastdecade. Andthebroadermarket,asmeas
uredbytheS&P500,hadrisenmorethan300%(ChartB)byDecember31st,1999.
Onemightviewthepoorreturnsofthelastdecadeasaconsolidationoftheaboveaveragereturnsofthe90s. Look
ingforward,wewouldviewanother lostdecade forequitiesasimprobable.
ChartA
ChartB
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Regardlessofwhatthenext10yearshaveinstore,webelievethatthejobofamoneymanagerisnotaboutmaking
bold predictions/bets on future outcomes,but rather about understandingthecurrentinvestmentlandscapeandinvesting
accordingly, whiletakingstepstoprotectcapitalwhenitappearsprudenttodoso. Thisprocess(i.e.recognizingthatthefuture
isunknowable) allowsustostaymentallyflexibletonewdata. Makingpredictions,ontheotherhand,cancauseoneto
staycommittedtotheirpositioneveninthefaceofnewevidencecontrarytotheirprediction. Theideaisnottopredict
thefuture,
but
to
seek
to
understand
the
present.
Currently,
we
believe
market
participants,
and
therefore
asset
prices
(stocks,bonds,commoditiesandrealestate)arebeingdrivenbothbyinflationexpectationsandthecontinuationofthe
globaleconomicrecoverythatbeganin2009.
INFLATIONPapermoneyeventuallyreturnstoitsintrinsicvalue zero. Voltaire
Inflation is avery realdanger for any investor
andcanhaveamajoreffectonassetprices. Fixed
incomeinvestorsmaybeparticularlyharmedbya
high level of inflationbecause theirbond invest
ments generallydo not provide for the samede
greeofpriceappreciationasstocks(whichcanhelp
tooffsettheeffectsofinflation). Withmassivegov
ernment stimulus, soaring federal and state defi
cits, and near zero interest rates on savings, it
wouldappearonthesurfacethatareturnofrobust
inflation is only amatter of time. CPI (awidely
followed measure of inflation), however, is cur
rentlyrunningatalowannualrateof1.7%. AsChartCshows,in2008theU.S.entereditsworstdeflationary(negative
pricegrowth)phasesincethegreatdepressionandhassinceonlyslightlyrecovered.
Tohaveahighdegreeofinflationrequireseitherahuge
increaseinaggregatedemandorasimilarlylargedecrease
in thesupplyofgoodsand services. Neithercondition is
currentlypresentorlikelyforsometime. Highunemploy
mentandlowcapacityutilizationhavecreatedalargelevel
of slack in the economy. Perhaps even more impor
tantly, however, is thatwhile rates have remained low,
consumer credit growthhas remained constrained (Chart
D).
Credit is thebackboneof thecapitalist system. In theNovember reportingperiod,consumercreditcontractedby
$17.1Billion. Fornow,theconsumerhasretrenched. Whilethedatasuggestthatrunawayinflationisnotashortterm
threat(
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GLOBAL ECONOMIC RECOVERYTheUnitedStatesisspewingapotentiallydamagingsubstanceintooureconomy greenbackemissions. WarrenBuffett,August2009
It isacommonlyheldviewthatthestockmarketisa leading indicatorofeconomicactivity. Overmanyyears,we
haveobserved that this isgenerally the case. Exceptions typicallyoccurat tops andbottoms (i.e.October2007and
March2009). Currently,globalassetmarketsare forecastingacontinuationof theeconomicrecovery thatstarted lastyear. Thereseemtobetwopolarviewsregardingthedurabilityofthisrecovery: theskepticsviewandthecyclicalre
coveryview.
Theskepticviewstherecoveryasdrivenmainly
bymassivegovernment stimulusand easymone
tarypolicy,notbelievingthattheeconomicexpan
sionissustainable. Inadditiontohistoricallyhigh
unemployment and consumer credit contraction,
weakness in the residential housing market is a
cause for significant concern among the recovery
skeptic. Newhome sales surprisedon thedown
side in theNovember reportingperiod, fallingby
11.3% from the monthbefore. The New Home
Sales chart (ChartE) illustrates themassivehous
ingbubble (and subsequent deflation) of the last
decade. Additionally, thenumber ofnewhomes
soldappearstohaveexperienceda deadcatbounce andresumeditsdownwardtrend. Housingstrengthwasanim
portantpartofthecyclicalrecoveryfollowingthe 0102recession.
Whiletheskeptichasrealcauseforconcern,postre
cessionary periods over the last 30 years have been
dominatedbythecyclicalrecoveryview. Evenaftertherecession that followed thebursting of the technology
bubbleandthetragedyof9/11,theU.S.economyexperi
encedabroadcyclicalrecoverythatlastedseveralyears
andbrought the DOW and S&P 500 to new all time
highsbyOctober2007. Infact,theeconomyisexpand
ingandmanyindicatorscontinuetoimprove. TheISM
PurchasingManagersIndex(PMI)isanindicatorofeco
nomichealthinthemanufacturingsector(ChartF). The
indexiscurrentlyat55.9(readingsabove50areconsid
eredexpansionary) indicating that the sector isexpanding,and therefore thegeneraleconomy shouldbedoing like
wise.In
addition
to
the
PMI,
the
Weekly
Leading
Index
(WLI),
aleading
indicator
of
economic
activity,
continues
to
signaleconomicexpansion.
Fornowitisclearthatthemarketisfavoringtherecoveryview. Werespectthecurrenteconomicandmarkettrend
and,whereappropriate,continuetopositionourmanagedaccountsandfundstowardsgrowth. Asalways,however,
weremainvigilantinrecognizingandunderstandingtheriskstotherecoveryandwillbecomemoredefensiveifwe
believeitisappropriatetodoso.
ChartE*
ChartF*
*Source:Moodys,Economy.com
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AMERICANMONEYMANAGEMENT,LLC
Gabriel Wisdom Michael Moore Jim Rhodes, CFA Mickey Christian Tom Jolls Joseph Dang, Esq. Managing Director Chief Investment Officer Executive Director Executive Director Executive Director In-House Counsel
Glenn Busch Adele Canetti Bryan Case Allen Kay Robert Frazier Vicki Moore
Portfolio Manager Portfolio Manager Financial Advisor Financial Advisor Financial Advisor Operations Manager
2009 YEAR IN REVIEW
For2009 theS&P500returned26.5%, InternationalStocks (EAFE)returned31.8%andbonds (BarclaysCapitalUS
AggregateBond)returned5.9%. Afterdecliningformostof2008(includingatotalpricemeltdowninthefourthquar
ter),mostassetclassesbottomedinMarchof2009andexperiencedrobustreturnsforthefullyear. Ouraccountsgener
allyperformedwellduring this reboundyear,havinghealthy exposure tomost recoveryasset classes. Stocks, real
estateand
commodities
all
recovered
from
oversold
conditions.
The
large
supply
of
sidelined
cash
raised
throughout
the financialcrisisof2008hasbegun to shiftback into theseassets,providingbothbuoyancyandsupport tomarket
prices. Moreover,thelackofanyrealinflationaryconcernsin2009causedmostbondorientedinvestmentstoperform
verywellthroughouttheyear.
YourPortfolioManagementTeam
Tel:(858)7550909 Tel:(888)9991395 Fax:(866)3641084 Email:[email protected]
2010: THE YEAR FOR BIG DIVIDENDS?
AccordingtothelatestanalysisfromStandard&Poors,2009wastheworstyearinhistoryfordividends.Dividend
cutsinU.S.tradedcommonstockcostinvestorsover$58billioninincome,with804companiesreducingcashpayments
toshareholders. Ifhistoryisanyguide,Standard&Poorssuggeststhattheworstisoverfordividendcuts. Itisesti
matedthatdividendswilllikelyrisein2010andreturntotheirpre2009levelssometimebefore2012or2013. Forour
clients,wearefindingwellruncompanieswithstrongbalancesheetsandtheabilitytopayincreasingdividendsover
time.
PleasefindacopyofourcurrentPrivacyNotice. WecanalsoprovideyouwithacurrentcopyofourSECFormADV
PartII,atyourrequest. Shouldyouhaveanyquestionsregardingyourinvestmentaccount(s),oriftherehavebeenany
recentchangestoyourinvestmentand/orretirementobjectives,pleasedonothesitatetocallus.
Thankyouforentrustingourfirmwiththemanagementofyourassets.
WishingyouaHappy,HealthyandProsperousNewYear!
MailingAddress:POBox675203,RanchoSantaFe,CA 92067
14249RanchoSantaFeFarmsRd,RanchoSantaFe,CA92067
www.amminvest.com