HapiMoney

The following post was written by Thomas King, a CPA and financial planner based in Kansas City.  The following letter was sent to his clients last week, and he allowed us to repost it in its entirety. These views are not necessarily reflective of his firm, CBIZ.

As you are probably aware, the stock market has taken it on the chin for the last 3 or 4 days.  I usually don’t like to use the term “correction”, as I believe the stock markets are efficient for the most part and there needs to be a buyer for every seller, i.e. there is essentially a winner and a loser for each trade that is made, making it a zero sum game.

This downturn in the markets has been expected for some time now, and it is my opinion that the economic troubles of Greece had very little to do with this recent downturn.  I guess I also need to include Spain and Portugal as part of the problems in the EEU.

For the US during 2010, our markets have continued to outperform the economy by the proverbial mile.  Much of this market performance was fueled by institutional buying, where manager compensation is primarily tied to performance.  For the most part, individual investors remained on the sidelines.

If there is any good economic news, you need to be able to sort through all of the confusing pro and con media stories.  It is my belief that…

• there has been a small amount of job (employment) improvement, which is somewhat contrary to what we hear from our government.  I’m not faulting the government for the lack of meaningful employment improvement. Heck, I can’t remember a time, other than during the presidency of FDR and his “New Deal” WPA program, where the government was actually able to produce a significant number of jobs.  Unfortunately, after the end of the WPA, unemployment retreated to its previously high levels.

• Although there have been a number of articles suggesting that business has used up all of the excess productivity from its slimmed-down workforce, business still needs to believe that there will be economic stability moving forward.  I do fault the government here for creating a very confusing and unstable economic picture for the next few years.
• Although the consumer has appeared to shed his or her dour view of the economy, and started shopping again, there is a good chance that this spending spurt may be short-lived without any significant improvement in the economy.

• The rather new “anti-spending” position of the government will also be short-lived, as incumbent politicians struggle to be reelected at a time when the voting public has started to figure out that many of these folk stink at what they do.

What should an investor do at this time?  I don’t believe that selling out at this point in time is the right answer.  I do believe that we will find some market stability in the near term.  Traders, and not long-term investors, are the main cause of our current volatility.  At some point these traders will determine that they can make more money in an improving market than they can make in a market that is trending downward.

If I had additional investment funds, I would wait for this upward trend or “momentum” to start back and I would be buying at the then existing lower prices.  If you were previously buying equities based on their dividend yield, the new yield will be that much higher.  Buying equities for their long-term growth potential will still be a favorable move.

I would tend to favor US equities over non-US equities, primarily Europe.  The inherent problems with the EEU aren’t going away overnight.  Greece will probably need to be saved again, as well as some of the other smaller, less stabile countries.  ( Do I smell socialism in these problems?)

In the fixed income markets, you will most likely find that the yield spread between the lower credit quality bonds and the better credit quality bonds will have increased over what it was a week ago.  You will be getting paid more for the additional risk you are taking by owning these high risk, high yield investments.  If you are somewhat risk adverse with your fixed income holdings, owning shorter-term bonds will help when the coming inflation storm begins.  For those in the middle of the risk scale, don’t forget the U.S government TIPs (longer-term inflation protected bonds).

Those of you that currently invest with us in our fully-diversified portfolios are well aware that we significantly favor US equities over their international counterparts.  In addition, we favor smaller companies over larger companies and value companies over growth companies.  Our research in general tells us that smaller companies have outperformed larger companies over longer periods of time.  The same is true for value companies versus growth companies.  The simple answer to the question of “Why?” is the concept of risk.

Thanks again for your business and the trust you have shown in us.  We wish you a most enjoyable summer season.

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