The Skybox View 

by Gregory Pacitti CFP®

The last few days have shown us both the worst and the best days in the equity markets for 2010.  The major stock indexes abruptly turned negative year to date and then rocketed back to positive territory after the European Central Bank announced they will spend nearly $1 trillion bailing out Europe’s sovereign borrowers (like Greece, Spain, and Portugal).  Without question it remains a challenging investing environment.    On one hand, the US recovery has been pretty much on track appearing like a “normal” recovery.  Companies have been reporting respectable earnings, the equity markets have been trending higher and forecasts continue to be optimistic. Governments around the world are contributing by printing cash and adhering to the “recover by any means necessary” mantra.  But, I can’t help but worry about a handful of items.  For one, the Shiller P/E ratio suggests that the US markets are currently 35% more expensive then historic norms.  Two, China’s over heated economy could be stalling out and their markets are falling near bear market territory. Three, unemployment is still high and housing is still low.  Four, the euro is falling and the recent strength of the US Dollar is suspect. And finally, nobody seems to have an answer how we are going to pay off all the seemingly limitless debt being issued.  I suspect that the current cyclical rally (short term trend) is nearing an end, and the secular (long term trend) bear market for equities is still not complete. This does not mean that I believe the market will go straight down from here.  $1trillion can buy some time for a while.  But the stakes are certainly high and I believe proactive investment management combined with core holdings of income focused securities will prove beneficial.  We have begun reducing risk for individual accounts by raising cash, implementing stop losses, and adding short hedges.  Our asset allocation remains slightly overweight fixed income and slightly underweight equities whiled focused on higher quality dividend paying companies.  Also, we have been hiring proactive money managers who can do all of the above.  However, in the short term the market trend continues to be up and it is difficult to “fight the tape”.  But as the saying goes, “The trend is your friend until it’s not.”   The crowd (which we refer to as the majority sentiment of investors and traders) has been extremely optimistic even after the Dow Jones Industrial Index lost almost 1,000 points in less than an hour before it rebounded. It goes to show that markets can change with lightning speed.  I believe there is enough evidence for me to stay conservative with equity exposures and “view from our skybox” for the time being until the environment looks a little clearer.  

 Please feel free to call our office if you would like to discuss your account personally. 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Gregory Pacitti.  Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Tax or legal matters should be discussed with the appropriate professional. Past performance is not a guarantee of future results. There are special risks involved with global investing related to market and currency fluctuations, economic and political instability, and different financial accounting standards. The above material has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete. There is no assurance that any trends mentioned will continue in the future.