August 2010

Diversification Remains Key

Housing, unemployment, and fears of back to back recessions, caused the most severe drop in the S&P 500 since 1983, as it dropped 4.51%. As usual, our numbers have been posted on the performance page. It has been a frustrating and at times humbling market so far in 2010, but with individual bullishness at twenty percent (not seen since march of '09) and corporate insiders buying, can a new leg up be too far behind? The technicals look fine and the fundamentals, while mixed, are reasonably sound:  

• Equities should significantly outperform bonds given their relative attractiveness, but are likely to remain volatile until the economic picture becomes more clear.
• I look for oil prices to remain firm, despite short term lessened demand, as longer term forces of diminished production and higher production costs kick in. 
• Basic materials will probably do just fine as long as emerging markets continue to grow their infrastructure.
• Gold is a bit elevated, but as the Fed continues its course of quantitative easing (printing money) and investors look to gold as the new default currency, then prices may well continue to rise. The fourth quarter is also seasonally bullish for gold, as India and the US build up their jewelry inventory.
• Technically (I'll continue to stress this till I'm blue in the face), buying power is higher and selling pressure is lower than it was at the April peak. Whether you're talking housing, commodities, or the market, when the buyers are more aggressive than the sellers, eventually prices should rise.

  I've heard a lot of pundits talking about how you have to be a stock picker in the current market. I say nonsense. In the bull market of 1982-2000, you had to be a stock picker if you wanted to beat the S&P because of fees and transaction costs. With the market we're faced with today, you have to get the macro right, and to get the macro right, diversification remains key. As long as you have something in the portfolio that correlates away from the market (gold and basic materials last month), then any heavy downdraft has a good chance of being averted.

-Joe