Newsletter
June 2010
First Half Results
The market stumbled badly in May and June finishing the quarter with a loss of 11.43% and reversing the first quarter's gain to a first half loss of 6.05%. Oristano's performance can be viewed on the Performance Page. Concerns over The Euro's weakness and fears of contagion from the Mediterranean countries, coupled with continued weak US employment numbers and negative consumer sentiment were the primary reasons given for the second quarter's dismal performance. With all of the negative news, it is no wonder that many pundits are now calling for a double dip recession (last seen in '81-'82), but when you cut through the noise, and look at the fundamentals, it is highly unlikely that such an event will occur. Here are some thoughts on the market and how I plan to navigate through the second half to hopefully produce some reasonable gains.
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Equity valuations are modest at 12.6x forward eps;interest rates are near zero causing little competition; large cash reserves are sitting in money funds or savings accounts;productivity and profit margins are strong and the Fed is on hold through most of next year. These are all positives for the market.
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Cyclical forces brought on by easy monetary conditions should be enough to half the current deficits by 2013, a goal recently set by the G20. Longer term, however, something drastic will have to be done in order to balance off the social entitlement programs. (source BCA research)
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Basic commodities have been weak as the recovery slows, but given that they have already reset, I would expect this group to once again outperform when China begins to loosen and the reflation trade gets back on track.
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Gold has treated us well over the past ten years, and with continued low interest rates and concerns over rising government debt, I would expect volatility within the confines of a continued up market.
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Finally, an idea supported by both BCA and Barons, healthcare could be the next bubble over the next decade. The reasoning goes that the large global pharma companies have done virtually nothing over the past 10 years. With multiples hovering in the 9-10x range and with the exploding Chinese middle class consumer, foreign sales should surge. I look to participate in this theme once the market reasserts on the upside.
In sum, most of the bad news is already baked into the cake. I think the second half will produce bumpy but positive results. As for Oristano, we posted a solid number for the quarter relative to the market and other investment advisors, putting us in a good position for another successful year.
-Joe
