2nd Quarter 2010 Commentary

Posted on Tuesday, July 20th, 2010

by James W. Heard, CFP®, President, Windham Brannon Financial Group, Inc.

Investments and Markets

I bet you’ve watched a horror movie, and you reached a point near the end of the movie when the boogie-man is dead, and everyone is going to be o.k.  Then… suddenly, he comes back to life, your heart jumps, and you might let out a little scream….

And, THAT is my description of the last quarter.

After 4 straight positive quarters that got us in sight of previous market levels, the boogie-man came back to life, and having talked to a few of you, I know your hearts have been jumping a bit.

On the positive side, as of this writing, our clients are virtually even for the year as their portfolios have recovered slightly in the third quarter.

Here’s a quick review of some of the market numbers ending June 30.

2Q 2010 Year-to Date Last 12 Months
90-Day US Treasury (T-Bills) 0.04% 0.06% 0.12%
BarCap Interm US Govt/Cr (Bonds) 2.97% 4.56% 8.29%
S&P 500 (US Large Cap) -11.43% -6.65% 14.43%
Russell 2000 (US Small Cap) -9.92% -1.95% 21.48%
MSCI EAFE (International) -13.97% -13.23% 5.92%
US REITS (Real Estate) -4.13% 5.28% 55.68%

Battle Fatigue

I sense our clients are beginning to experience fatigue and frustration with the markets, as are we, and you may be wondering – is there a better way?  We’ve spoken publicly and privately of our dim view of market-timing, commodities, hedge funds, and private equity.  What you may not know is that we are always researching these and other approaches to building portfolios.  Our commitment to our current strategy is not due to a lack of research; rather, it’s because of hard work in analyzing other approaches to investing that make us even more committed to our investment philosophy.

No Spin City


We always preach that our clients’ equity allocations are for 10 years and beyond.  So, let’s not just talk about our philosophy but apply it to the last 10 years, arguably one of the worst.  So, how bad was it?

A hypothetical investor retiring on December 31, 1999 with our current equity model portfolio would have earned over 4.5% per year on their stock allocation through 2009, assuming quarterly rebalancing and reinvestment of dividends.

Is that great?  Of course not.  Is it catastrophic?  It’s not even close, and it’s equal to bond returns on an after-tax basis.  It’s also well ahead of U.S. markets which earned nothing for those ten years.  And with 20 years or more remaining for a retiree, history tells us that equities likely will produce even better results in the future.

Economics and Politics


Let’s face it.  It’s hard to remember a time when the country’s political process has seemed so broken.  Voters don’t like either political party, and frankly, they have good reason to be upset.  It’s the dark side of democracy, and while we should still have confidence in the process, the “sausage making” isn’t pretty.

As I expected, unemployment is not improving significantly even though businesses are doing well and sitting on almost $2 trillion in cash.   So why won’t businesses hire?  Good business owners view a new employee as an investment decision.  As with any investment, there is an immediate financial risk and a potential future return on that investment.  More regulation, higher taxes, and anti-business rhetoric make that risk/return relationship less attractive.  Until the electorate understands this, we will not have a government that is conducive to higher employment.

Many of you have been reading a lot about the increasing risk of government bonds and the possibility of government defaults.  I’m not as concerned as others.  It was never written in the bible of finance that government bonds always had to be safer than corporate bonds.  Bond ratings of all issuers are subject to financial fundamentals and behavior, and right now, many local and national governments aren’t doing so well on either front.  As I’ve said before, if the leaders or electorates will not discipline themselves, then the capital markets will oblige them with higher interest rates….at some point.

Whether they know it or not, governments are now in a race to get their fiscal houses in order.  Governments must balance tax rates that are low enough to attract businesses and workers, yet high enough to support infrastructure, needed services, and lower debt levels.  This in turn will drive vibrant economies, good employment, and the needed tax revenue to service debt.  This new competitive environment among governments will be a very good thing.  The race will go to those countries/states/cities that realize that they’re in one.

What’s New


In addition to some cosmetic changes to our website, I’ll be introducing a blog later this year.  The primary purpose of the blog is to introduce short topics that better explain our investment philosophy.  It will also allow us to communicate with you quickly about any important current event or planning topic.  It should be operational by late September, and I look forward to hearing your feedback after you’ve had a chance to review it.

Have a great summer!

Best regards –

© 2010 Windham Brannon Financial Group, Inc. All rights reserved. Any use of information contained in this article, including reproduction, modification, distribution or republication, without the prior written consent of Windham Brannon Financial Group, is strictly prohibited.

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