Market Snapshot – Volatility is Back

Market Snapshot – August 5, 2011

Volatility is Back

Not unlike the summer of 2010 (or the summer of 2009, or 2008, or 2007), we have seen the markets go back onto the roller coaster.  While the reasons are disconcerting, and the prognosis is still uncertain, we are well positioned to ride through the volatility.  In a brief snapshot of events this week:

 

• The broader U.S. market lost all of the gains for the year and slipped into negative territory.  When this “slip” occurred on Thursday, it helped to fuel an extensive sell-off late in the day, resulting in nearly a 5% drop by closing.
• Bond prices have mostly held steady.  Investment grade bonds are up, while high-yield markets have shown a little slippage.  Nothing to cause a disruption in either direction, except for the temporary spike in Treasury prices and the commensurate drop in rates to extreme lows.
• Gold screams ahead – a traditional safe haven.
• Individual stock prices have shown more volatility than the index.  Basic names such as Dow are getting hammered, while Apple has retained its short-term gains based on their recent earnings release.
• The S&P is trading at 12-times projected earnings, well below the historical mean of 16x.

 

The roots of these events, however, are not so obvious:

 

• The debt-ceiling debate, while resolved for the time being, did serious damage to the national psyche.
• The debt reduction measures, incorporated into the debt-ceiling legislation, will reduce our overall productions by 1-2% per year based on estimates.
• GDP growth in the first half of the year was anemic (<1%).
• All combined there is a real possibility that we could enter a recession again.

 

Through all this, we have not heard from the Federal Reserve Bank.  While Congress is unable to discuss any stimulus given the political climate, the Fed is free to act independently.  Most likely, if there is a serious threat of a double-dip recession they will again act to inflate asset prices through a variation of QE2.

Our portfolios have fared well in this environment.  We took several steps over the past three weeks to hedge against this situation: raising cash, lowering equities and selling potentially volatile bonds.  All of these steps are important to buffer against losses and now we are well positioned to increase positions at some very attractive prices.  The challenge, of course, is to find the bargains that will retain long-term value.

Our work continues.  But in the interim, I want to emphasize that we have stayed ahead of this correction while keeping options open to us.

 

Please write or call with questions.

 

Regards,

 

David

 

David B. Matias, CPA

Managing Pricipal

Vodia Capital