2016 Second Quarter Client Letter

July 2016 Excerpts

We have made it half way through the year. It has been a roller coaster ride for stocks but less so for income oriented investments. We began the year in February with a major sell off in the stock market and then a V shape rebound. Next we had Brexit with a one week panic in June followed by another V shape recovery before the end of the second quarter. The S&P 500 increased 1.9% for the quarter and 2.7% YTD.

In contrast, income oriented securities were positive across the board probably in part due to the absence of any Federal Reserve action and price appreciation from yet lower interest rates globally.

We have moved from earning interest on the capital we lend to earning nothing to now actually paying governments for the privilege of holding our money.   At this point $3 Trillion of the world’s government debt is carrying negative interest rates. This is being done in the name of stimulating investment and spending. Initially the low interest rates gave the economy a boost but at this point one needs to question the success and unintended consequences of continuing these policies.

There is a high level of concern about a new financial crisis driven by events that are not yet defined.   Brexit and our Presidential elections are two examples as the public looks for change.

I read a good quote recently that speaks to this point. Evidently Queen Victoria requested change from the then British Prime Minister. His response to the Queen was “Change? Change? Aren’t things bad enough as they are?”

The presidential election is five months away and at this point the two assumed candidates present a clear contrast in style and proposed policies. While I am not sure it makes sense to make portfolio choices based on a certain candidate’s policy statements, it is reasonable to expect greater market volatility as the election gets closer.

I could wax on for days about current events and possible outcomes. Since you read a good bit and the news is on 24-7, you probably have your fill of economic and political news so I will focus on the implications for the market and your investments.

The investment returns over the last year have been very modest. Going forward we expect increasing volatility in the months ahead and continued modest returns. We have structured your portfolio at this point to participate in any upside in the stock market but at the same time are maintaining diversification to limit risk through investment in preferred stocks and convertible preferred stocks that offer a higher yield, investment grade bonds that pay a modest return and are safe and a healthy dose of cash that can be held or committed when good investment opportunities surface.

There are still opportunities for investment. The question for now is whether it is a good time to commit more to the long term market.