| In
the spirit of the World Cup, let's break out the vuvuzelas and cheer
on the home team! Over the past ten years, the cumulative gain for
all of our clients is + 43%. Each Dollar invested with our Firm
in the year 2000 is worth $ 1.43 today. In contrast, the cumulative
loss for the S&P 500 over the same decade is - 15%. Each Dollar
invested in that Index is worth just 85 cents today.
We have worked very hard for a very long time to preserve
all of our clients' assets, and have managed the portfolios against
downside risks in highly volatile equity markets. We have consistently
delivered positive returns, and have out-performed the major benchmark
in both relative and absolute terms. Goal!
It would appear that the stock market has commenced
the second downturn which we have been anticipating. If history
is any guide, the second downward adjustment could be more severe
than the first. We experienced the first at the end of 2008 and
early 2009. Then, there was a subsequent and highly speculative
rebound which, try as it might, still did not erase the earlier
losses sustained by many investors. This next leg down could be
more harrowing, and like the first, it will be exacerbated by a
shortage of liquidity. The maw between bid and ask will gape wider,
and many stocks could fall to prices equivalent to their book value
per share. Considering that the overall indexes are trading at three
times book value, the downside could be quite precipitous.
We and our clients are prudently on the other side
of the liquidity issue - we are safely in United States Treasuries
which can be converted immediately into cash. It is now a matter
of prudence as we prepare to re-invest that cash into deeply discounted
equities.
What would the equity portfolio contain? Over the
past several years, many businesses have taken dramatic steps to
rein in costs and foster long-term profitability in their operations.
Non-performing assets and burdensome debt have been winnowed away
from corporate balance sheets, and there has been a concerted effort
to improve safe and efficient production. We believe that as overall
economic conditions strengthen, those companies which have well-managed
businesses should reap major rewards from an increase in sales revenues.
Therefore, we seek to invest in those companies which consistently
maximize their operating margins, and are able to produce solid
earnings results. Since the consumer is the catalyst for economic
expansion, we favour those industries which should benefit from
an anticipated increase in consumer spending: retailers, restaurants,
and technology.
What about interest rates? Concerns about the sovereign
debt crisis in Europe and about the ballooning debt of the United
States have impacted currencies and interest rates. We anticipate
that domestic short-term rates will remain low in the near term
in order to facilitate the economic transition of many businesses
which are facing immediate challenges. However, as overall economic
conditions strengthen and as industries resume a solid level of
profitability, we should expect a commensurate rise in interest
rates. Financial institutions, insurance companies, and construction
and mining concerns ought to benefit from any modest uptick in short-term
rates.
Is it time to buy stocks again? It could be soon.
How quickly could we be re-invested? Depending upon
market conditions, we could be substantially invested in equities
within a very short period. In the meantime, it is imperative that
we maintain our strict disciplines, and identify opportunities in
the midst of panic selling in order to snatch up bargain priced
stocks of well-managed companies.
George A. Leylegian
President and Chief Executive Officer
|