November 28, 2011

To Our Valued Clients

As the attached chart shows, in the past 115 years there have been four secular bull (up) markets in the United States, and four secular bear (down) markets, as measured by the Dow Jones Industrial Average (DJIA).

A secular bull market is a long term upward trending market, where each successive high point is higher than the previous one.

Conversely a secular bear market is a long term downward trending market, where the trend does not rise above the previous high.

According to the attached chart, the four secular bull markets lasted 43 years in total, while the four secular bear markets lasted 72 years. Yet the cumulative return for the secular bull markets was 1,601.06%, while the cumulative return for the longer lasting secular bear markets was 4.05% (through December 2010).  For that reason the DJIA over that period of time has gone from about 50 to over 10,000.

We are in the 12th year of the fourth secular bear market right now.  But the chart tells us that even in secular bear markets, there are up years in which money can be made. 

The current secular bear market is an example.  It began with the popping of the tech bubble in March 2000 and a severe down market.  But the market turned in October 2002 and we had up markets from then until October 2007.  The market turned down again with the busting of the real estate and credit bubbles, and was down until April 2009.  Then it turned sharply up and gained until June of this year.  Now it is down again, but will turn up again at some point.

Starmont has been able to keep the losses small in the downs, and take advantage of the ups.  As a result Client portfolios are positive across the board.  We have been able to do this by expanding Client stock allocations into international markets, both developed and developing,  and through investing in bonds, both domestic and international, corporate and government, investment grade and non investment grade, dollar denominated and non dollar denominated.  And we have done all of this using the very best stock and bond portfolio managers in the business, with long successful track records in up and down markets. It has not been easy in this environment, but we have worked hard and have been successful at it.

We know that it is not an easy time for you.  But still in these difficult times there is opportunity for those who are vigilant.  Starmont will continue to look for the best, while trying as hard as we can to prevent the worst—just as we have done in the past. We appreciate your trust and confidence in us, and we work hard every day to earn it.

 Moving Into the Next Secular Bull Market

What has to happen for the current secular bear market to end so that we can move into the next secular bull market? And what do we have to do now to enjoy the benefits of that bull market when it arrives?

Bring Resolution to European and United States Debt Issues; and Solve the Underwater Real Estate Problem

As mentioned above, the current secular bear market was caused by two bubbles and the collapse of those bubbles—the tech bubble collapse in 2000-2002 and the real estate bubble collapse still going on.  The real estate bubble in turn was caused by what you can think of as a debt bubble as lenders granted mortgages to borrowers who were not in a position to pay it back when the real estate bubble collapsed, and as countries and States took on enormous new debt to fund wars and to provide goods, services and jobs to their voters.

           Europe—Member countries of the European Union will spend much of 2012 resolving their government (sovereign) debt issues.  Resolution could take the form of (1) restructuring (delaying) the debt; (2) defaulting on the debt (causing the holders of the debt serious problems); (3) the creation of a larger role of “Federal Europe” in member countries’ financial affairs; and/or (4) member countries leaving the European Union so that the various countries would go back to having their own currencies (instead of the Euro), and each country could then create new currency and pay off its debts in the new (and deflated) currency.  By the end of 2012 we expect EU members to have figured out what they wanted to do, and to have begun executing their plans.

           United States and State Debt—States are making progress in bringing debt under control by reducing costs—mostly by (1) firing people (not great in a high unemployment environment); (2) reducing their obligations on retirement plans for those workers who remain; and/or (3) raising revenue mostly in the form of fees and new/higher taxes. We think that by the end of 2012 most of the States (and their inhabitants) will have worked through this.

                                                     The United States Government has not been able to deal with the debt issue.  The Democrats want to lower some expenditures and to raise revenue by increasing taxes on the wealthy so that services are not cut too far for those needing them most, and that some money can be spent on programs to generate growth and create jobs.  Republicans want to lower expenditures but will not agree to raising taxes on the wealthy.  The American people will have to resolve this in November 2012.

          Individual Debt—the Mortgage Problem.  There are millions of mortgages owed by individuals in the United States that are underwater–the property which was purchased using the proceeds of the mortgage loan issued during the credit bubble is now worth less than what is owed on the mortgage.

As a result the people owing on the mortgage (1) are not making mortgage payments (but retaining possession of the property); and/or (2) are mailing in their keys and moving out (leaving the property vacant and deteriorating); and/or (3) being foreclosed against by the holder of the mortgage; and/or (4) are making their mortgage payments but not spending on other things (thus hurting the economy and keeping unemployment high).

The solution to this problem seems to be some kind of national debt reduction program so that people could get above water again and get on with their lives.  This program might include solutions such as principal write downs, refinancings, forbearance on present mortgage payments, and converting some ownership to rentals. Without such a national program the United States is likely to see continued slow economic growth, high unemployment and stagnant home values.

A national program would require action by the Congress of the United States—which could happen after the election in November 2012.  Losses to lenders as a result of this program likely would be shared in some manner by the Federal Government and the lending institutions.

 2012—A Transition Year

While this is going on, what should we be doing with your investments and other items on your balance sheet to prepare for better times? 

1.  Preserve and grow at least at the inflation rate.  Starmont has been doing this successfully for our Clients for the last 12 years.  We want to avoid the big loss.  We want to take advantage of rallies in the markets.   And we want to invest in investments that will return at least the inflation rate so as to prevent any loss of purchasing power in your investments.  The inflation rate is running around 3% at the present, and the bond funds in which we have your money invested at present are covering that—and a bit more.  As interest rates go up (not likely any time soon), and the value of outstanding bonds (and bond funds) go down, we will have to revisit the bond fund investments.  We are watching this situation closely. 
2. Look for opportunity in non traditional asset classes.  We have been reviewing real estate funds (commercial and residential); commodities funds (including gold); mutual funds that follow hedge fund like strategies (i.e., long short; distressed; arbitrage; managed futures; etc.).  We want only liquid investments at this point given the volatility in the global economy and markets.  We plan to be in a position to implement some of this research in January, where any taxes on the sales of existing positions would not be due until 2013.   
3.  Look for opportunity at other places on Clients’ balance sheets. For example, there is likely to be some horse trading in 2012 as Republicans seek to have the Bush tax cuts extended, and the Democrats look for extensions of unemployment benefits and other programs designed to lessen the pain of the unemployed.  Speaker of the House Boehner said at the end of 2010, the last time this kind of thing went on, that he got 95% of what he wanted.  Assuming this happens again, there may be some changes in the income, gift and estate tax laws that need to be examined and utilized where appropriate, for example for those of you making gifts, and for those of you expecting gifts at some point.

Conclusion

These are difficult times.  We know that many of you are nervous.  We are focused on preserving what you have, while taking advantage of opportunities as they arise.  If the pattern in the attached chart continues (which our lawyers hasten to point out may not happen), there are better times ahead.  We will continue to work with you to deal with the present, while positioning you for the future.

 Introductions

If you know someone who you think could benefit from Starmont’s services, please introduce them to us by calling 888-386-8630 or e-mailing advisors@starmont.com.  Our Clients are just like you.  If you have had a good experience, anyone to whom you refer us is likely to have a good experience.

As always contact us with questions, concerns or comments.

 Your Starmont Team

Tags: asset management, equity allocations, Harvey Rowen, Investments, market performance, Portfolio Management, Starmont, Stock Market, Wealth Management

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