Investment Commentary, Q4 2011

After an October rally, volatility has not died down, and investors continue to be concerned about the prospects for their investment portfolios.


The congressional debt commission failed to come to agreement, and automatic spending “cuts” will take effect if the greater body of congress fails to act. In reality, there will be no automatic “cuts” as the cuts in question are simply reductions in the rate of increase in government spending over the next 10 years. With elections coming up, it is unlikely that any substantive changes will be made on the policy front as politicians focus instead on the 2012 elections.


Economically, anemic growth continues, and as we’ve mentioned before, corporate America is in great shape despite poor economic conditions. Stronger balance sheets abound, companies are cash-rich, and they are investing selectively in expansion opportunities as they find them. Many companies’ stocks look very attractive compared to earnings and dividend yields are relatively high.


Bond yields have remained low. The Fed’s “Operation Twist” combined with further economic uncertainty have led to declining long term yields, with the 10-Year Treasury Bond now at 2.0% down from 2.99% in July . Triple-A credits currently yield 2.32% down from 2.77 just a month ago . We continue to urge our clients to avoid bond exposure as much as possible while maintaining enough exposure in short-term, high quality issues sufficient to buffer volatility to an acceptable level to ensure a minimum level of investor comfort. High-yields and junk issues should be avoided, as investors may be better served to search for yield among high-quality equity issues.

Real Estate

Publically-traded real estate prices have corrected with the rest of the equity market in the 3rd quarter. Green Street Advisors reports that publicly traded REITS are currently trading at a 3.9% premium to net asset value . We continue to look to real estate as a potential bond alternative, positioning our clients to hedge against both unexpected inflation (real estate is a real asset) and unexpected deflation (real estate, like nominal bonds, produce current income). Non-traded REITs continue to find bargains as distressed sellers liquidate properties to cover their losses from the poor real estate market. We expect that real estate will be a great asset to own as the economy recovers further in the next 3-5 years.


With the decline in equity prices in the 3rd quarter, the Shiller CAPE10 (10-year Cycically-Adjusted Price to Earnings Ratio published by Prof. Shiller of Yale University) has declined markedly to 20.0 from 22.97 at the beginning of the year, and from over 23 in the 2nd quarter . We continue to recommend that client accounts lean towards value managers who purchase stocks of companies with good growth prospects at reasonable prices. Indeed today represents a relatively good time to buy when compared to valuations of the past 12 months.

Gold and Commodities

Gold corrected in the August through October period, with prices as reflected by the SPDR Gold Trust (GLD) declining from a high of $184 to just $156 . We continue to urge investors to examine their purposes for wishing to add gold to their portfolios at this time. Some wish to use gold as a fail-safe for economic collapse, in which case a small amount of physical gold may be appropriate. Others wish to purchase gold simply as a hedge against further dramatic declines in the dollar. We believe there are better vehicles by which to hedge against both currency risk and inflation risk. Generally any real asset (Treasury Inflation Protected Securities, Equities, Real Estate, Commodities, etc) are a great way to hedge against long-term inflation risk. Liquid currency exposure can also be diversified through foreign currency investment. Generally we recommend that our clients re-examine their long-term investment goals and determine if any changes are necessary to their broad asset allocations.

We continue to encourage clients to enhance their diversified asset exposure and to stay the course, even in these turbulent times. We value each one of our clients and wish to help you make the most of your wealth. Feel free to contact us at any time with any questions you may have about the markets, economy, or your investments with our firm.


Jeremy S. Mitchell, CFP®

Posted in Current Events, Economics, Investing, News and Views.