Time to take chips off the table
While the third quarter has turned out well on a performance basis, three noticeable
developments have occurred that cause us to reduce your risk exposure:
1) Classes of investments (stocks, bonds, etc) are behaving in a much more
correlated manner than in the historical past. This is bad because a portfolio has
more volatility per unit of risk than it would have had in prior years. Some
investors are taking more risk than they realize.
2) The real economy in the United States is slowing. Housing starts, auto sales and
consumer confidence have been declining for over six months. At some point this
will translate into lower corporate earnings.
3) The Federal Reserve’s decision to lower interest rates has initiated a new leg
down in the dollar and boom in commodity prices. This may lead to higher
import prices and commodity inflation in the future.
The path of least resistance for the stock market remains higher. However, bullish
supporting evidence is diminishing. There is potential for significant volatility in
the fourth quarter. Client positions have been modestly reduced.
I have been asked why we hold precious metal and commodity stocks in all accounts. A
great example of why was pointed out by another advisor friend, Mr. Herb Gernert. He
stated:
“Little notice was given recently to the fact that the Senate raised the U.S. debt limit for
the fifth time in six years to almost $10 Trillion. ….. Did you ever think how $10 trillion
in debt can be repaid? It can't. To appreciate the magnitude write out 1 followed by all
the zeros, I think there are 13.”
I believe that the government has chosen to depreciate the dollar and risk future inflation.
Thus, strategy can work as long as global labor costs are being lowered through the
addition of Chinese and Indian workers. In the long run, the dollar is not a good place to
preserve purchasing power in a global environment. Gold, commodities and foreign
equities are the safe haven to retain purchasing power in the event of a future dollar or
inflation crisis.
NOYES CAPITAL MANAGEMENT, LLC
Retirement Planning, Financial Planning, Investment Management
www.NoyesCapital.com
973-267-8120
The stock market is being supported by several positive factors
:•
institutions are prone to supporting the market;
Human Nature - After four years of positive momentum, market participants and•
greater than bond and interest rate potential;
Stocks remain cheap to bonds – The earnings potential from stocks remains•
companies maintain their growth;
Strong global growth – The globalization of the stock market has helped US•
Washington vacillation – Good for business.Negative themes including;
•
Slowing US Economy - The economy is starting to slow;•
portfolios more globally into non-dollar investments;
Weakening dollar - Foreign central banks are diversifying their investment•
and other mortgage debt; Many investors, including hedge funds and
mutual funds own this debt;
Credit Quality Concerns – Credit spreads are widening due to concerns with subprime•
interest rates and higher commodity prices, many US consumers are suffering;
Weakening US consumer balance sheet – Due to declining housing values, rising•
emerging markets is increasing global commodity prices.
I try to stay focused on the intermediate term trends for various investment choices and
economic trends. My opinions are as follows:
Increased global commodity prices and inflation - Global demand pressure from•
US stocks – neutral trend;•
Foreign stocks – remains bullish;•
growth. Core inflation remains at 3%.
Long term inflation – higher commodity inflation is offset by lower wage•
ease to 4%;
Short term interest rates – sideways trend at 4.5%, potential for another Fed•
Long term interest rates – sideways trend at 4.5%;•
Real Estate – trending lower, no bottom in sight;•
The US Dollar – trend is lower but due for a bounce;•
Corporate earnings growth – slowing down but positive (7%);•
Tax rates – expected to shift from sideways to higher rate trend.NOYES CAPITAL MANAGEMENT, LLC
Retirement Planning, Financial Planning, Investment Management
www.NoyesCapital.com
973-267-8120
Our overall investment strategy for the Fall is to remain patient and invested
according to your Investment Policy Statement.
long-term trend of the market, we are concerned about the decline in the dollar. We have
moved to a slight overweight in large cap stocks, both US and foreign, and an
underweight in small cap stocks. We continue to hold modest gold positions as a hedge
against global tensions and inflation, which can heat up at unexpected times.
While we remain optimistic on theWe strongly believe that a diversified portfolio should continue to perform well over
the intermediate-term horizon.
of asset classes as some previously leading sectors suffer and new leaders materialize.
Sector allocation and fund manager selection will be keys to performance in upcoming
quarters.
However we are likely to see a shift in the performanceI remain optimistic that 2007 will be a successful year for investors.____________________________________________________________________
Scott P. Noyes, CFA
independent fee-only wealth management firm based in New Vernon, New Jersey. See
®, CFP® is the President of Noyes Capital Management, LLC, anwww.Noyescapital.com
________________________________________________________________________
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