3rd Quarter 2010 Outlook
This edition of the Lowry Letter has been a bit long in coming. We have been watching the events of recent months, including turbulence in the capital markets and the political arena, and doing our best to gauge how it will affect you, our clients. There is no question that we are dealing with issues and problems that we have not come across before. That being said, it is too early to know how different the future will be from what we have experienced.
The current mood of much of the investing public is reminiscent of a seldom-told story with a powerful message for our times. Legend has it that there was once a tiny and obscure village in a far away place which, except for its extraordinarily fine wines, was otherwise rarely recognized.
On the occasion of the town's 500th anniversary, the town council proposed that a large receptacle be set up in the main square, and that all the vintners of note would be invited to bring a gallon of their finest wine to be mixed together and enjoyed by all during the celebratory feast.
On the day of celebration, the town mayor stepped forth and drew the first glass of wine to sample this rare combination. All were silent as he raised the glass to his lips. To his astonishment what he tasted was WATER!
Apparently, when faced with the thought of giving up a portion of their best vintages, each vintner assumed that if he/she simply deposited water instead, that no one would notice.
The moral of the story is a simple and compelling one. The contribution, or failure to contribute, of each and every citizen does make a difference, and nowhere is this truer than with our economy.
In the past during wartime, Americans stepped up to the plate and purchased War Bonds to provide the necessary funding for the war effort. In peacetime the common practice has been to purchase stock in publicly traded companies to provide the necessary capital to create jobs and build our economic base. To modify an oft-referenced quote from the comics, “We've seen the economy, and the economy is US!”
At this time we feel it appropriate, as individuals and a firm, to (re)state our position regarding our economic system.
We are unapologetic, unabashed, and unashamed believers in free market principles (i.e. capitalism). We have great faith in our economic system and its positive future. We believe that the United States of America will be a viable and growing economic force for many years to come. As a nation, we have repeatedly shown the ability to overcome each and every challenge. This is true because at each critical moment we have moved forward with a positive expectancy in our conversations, our perspectives and our investment strategies.
Unlike the noted investment manager Roger Ingeman who once proclaimed, “The only thing bonds are good for is getting out of jail!” it is no secret to any of our clients that we consider bonds to be an important part of any investment portfolio for investors of any age. At the same time, bonds by their nature are not growth instruments, nor do they afford ownership in their issuers on behalf of their holders. They are debt instruments.
Stocks on the other hand afford ownership to the holder in the companies that issue them. Stocks create capital. Capital creates jobs, and so forth.
On any given day when we get out of bed we have two choices. We can suit up for the game of life and be active participants, or, we can choose to sit back and wait to see what happens. Warren Buffett said it best in 2008: “If you wait for the robins to sing, spring will be over.” Therefore, and just in case there was any doubt in your minds as to how we see the future, we're putting our best "wines” in the vat!
That stated, please recognize that your concerns and your interests, as our valued clients, are always foremost in our minds when assisting you in planning for your future. We will continue to make every effort to ensure that your investments are indicative of your risk tolerance and investment objectives.
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As with any major governmental action, such as the healthcare legislation or financial regulatory overhaul, there are always unintended consequences. We continue to feel that the chances of a double-dip recession occurring are fairly slim. The momentum created just by the return to some level of economic normalcy following the financial crisis should be sufficient to provide continued, below-average economic growth. Company earnings and economic activity continue to improve from the abysmal levels reached in 2009, and corporate balance sheets are largely are at their most cash-rich levels in decades.
In sum, we are less concerned about the state of the capital markets in isolation than we are the impact of those unintended consequences mentioned above. Many people are aware, at least anecdotally, that banks "are not lending." this is our general observation as well. The truly pertinent issue is not that they are tight with their capital, but WHY.
One reason is that the regulatory landscape continues to be uncertain. Despite tremendous Federal encouragement to lend money, banks do not want to deplete capital reserves until they know how regulatory changes will affect them. Changes in their ability to trade in a propriety capacity and restrictions on the use of derivatives, while coming from a desire to avoid future financial crises, reduce overall profitability and induce banks to take less risk, therefore, less fewer loans are made. This is just one unintended consequence.
The desire to win points with the electorate has incentivized the demonization of business. The resulting antagonistic environment makes investors less likely to devote capital to industries that may come under heightened Congressional scrutiny. This is another unintended consequence.
Decisions to hire more workers or invest in more efficient equipment have to be made with an eye toward increased health care plan expenses and the possibility of a higher regulatory burden. We don't dispute the need for regulation. But this much regulation, this soon after a debilitating recession, is too much, too soon.
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Many of you may have interacted with her already, but we want to formally announce the addition of Lacey Akins to our team. As a paraplanner her primary focus is to assist in the creation and monitoring of our financial plans and to assist in the monitoring and maintenance of our investment portfolios. She is an excellent compliment to Bea Caldwell, who has been a member of our team for almost ten years.
You may receive an e-mail from our office asking you to participate in a brief survey. We have partnered with a client-feedback firm in order to aid our efforts to improve.
We appreciate your trust and confidence. Our mission is to help you achieve your goals. Despite the very challenging economic environment we are optimistic about the future, particularly when we consider the fine people that we are able to work with.
