It was a disappointing period for us, with May and June’s declines wiping out all gains for the year. Thoughour gold accounts beat the index in the first half, losing only half as much, our resource accounts fell around5%. Similarly, our global accounts lost some ground over the period, with the mid-risk growth accountdown, though less than 0.5%; our conservative accounts rose just 1.6%, while our aggressive accounts weredown (though largely due to one anomalous account).*Although we mostly underperformed the indices in this period, we are comfortable with the value in what weown. The high allocation in our global accounts to resources, which were among the hardest hit sectors, isthe primary reason for this relative performance, while the juniors, which dominate our gold and resourceaccounts, fell more than the big caps this quarter. Many of these juniors, however, are selling at compellingvalue and we expect them to rebound quickly when the resource sector recovers before the end of the year.Similarly, many of the other stocks that have fallen more than the broad market in the last couple of monthsalso represent good value at these levels. I suspect that precisely these stocks will rebound the most.
Economy stumbling as easy money continues
Given the economy, it’s not surprising that the market fell in the last couple of months. QE2 clearly did notwork. Ben Bernanke finally seems to comprehend this, though he has no idea why. So even as the economicrecovery seems to be stalling, with jobs growth changing from tepid to abysmal and house prices downagain, the Federal Reserve failed to announce a QE3 as the previous program came to an end.Although the Fed did not announce a new program to follow the end of QE2, it is clear that monetary policyremains loose. The Fed has stated that interest rates will stay low for an extended period and made clear thatalthough it would not (for now) introduce a new stimulus program, it would make ongoing purchases fromprincipal repayments. So there has been no “exit”, and the Fed’s balance sheet will remain large.Federal Reserve credit has grown at over 45% the past three months; that is not being withdrawn. And whileit’s a political assessment as much as an economic one, I am guessing that, given Uncle Ben’s puzzlement asto why the Fed’s textbook prescriptions have not worked, and his obsession to avoid a depression, not tomention an election little more than a year away, the Fed will institute a QE3 at some point in the future(although perhaps called something different). Once economic reports deteriorate sufficiently, the Fed willtry to stimulate again.
Banks, employment and housing: all hurting
Surprising to some on Main Street, the bank and financial sector is hurting, hit with staff layoffs and otherexpense cuts; Goldman Sachs expects to lay off almost 2,000 employees by the end of the year. No wondersales at the Manhattan Maserati dealership have dropped by a third just in the last month!More importantly, the housing market remains in very poor shape in most parts of the country. Prices aredown again, as are sales. Significantly, of the mortgages in default (two months or more in arrears), fully30% have not made a payment in over two years. These are not people who are trying to keep up and with a
* Please note:
Past performance is no guarantee of future results.
For complete information on our past performance, including factors tobe considered in viewing past performance and other disclosures, please contact our office. Specific stocks mentioned herein are intendedsolely as illustrative of strategies and types of stocks we are buying or selling, and are not intended as indicative of entire portfolios or of anyindividual client’s portfolio. The numbers mentioned represent our composite averages. They represent all accounts that fall within the statedobjectives which have the ability to buy and sell options; they exclude accounts under $200,000 and accounts with significant limitations orrestrictions that would make them unrepresentative of the account type. Performance figures for composites referred to herein reflect thededuction of administrative fees, but may not take into account all performance fees attributable to the specific period. The performance of any individual stock or stocks does not take into account fees. Performance numbers include dividends; dividends are not reinvested.Commissions charged may vary depending on the brokerage firm at which an individual account is held. All accounts are managedindividually and are therefore different, even within the same broad objective. Factors such as an individual’s circumstances, the size of theportfolio, and the time the account opened can affect specific buy and sell decisions. Factors such as price movements and security liquiditycan affect whether any trade is made for all accounts. Global Strategic Management, an SEC-registered investment advisor, does business asAdrian Day Asset Management.