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Letter to Investors: Year in Review.....Year Ahead


As the opening trading days of 2012 begin, most investors are looking through the front windshield at the road ahead in search of this new year's opportunities.  Any good driving instructor would tell you, however, that focusing ahead is best served by an occasional look into the rearview mirror!  Below is a note that I sent to investors in which I point out a bit of both...a commentary on 'what happened' as a way to develop a view on 'what will happen'.




As always, this is not meant to be financial advice in any way, and it's up to readers to opine and decide for themselves as to the relevance of what's written in this piece to their individual financial profiles and investment goals, but as 'food for thought', it's intended to provide some valuable input into developing a navigatable roadmap for investment opportunities as we kick off 2012.




Letter to Investors:

It might sound a bit cliché-ish, but as I sit down to write this note, it bears mentioning that the first thought that comes to mind is “boy, how time flies”!  It’s hard to imagine that a whole year has gone by since I was writing 2010’s review in which I noted that the markets were driven and troubled by, among other things, ongoing economic crises in the European “PIIGS” countries, squabbling in DC between President Obama and the then newly elected House majority of Republicans, Fed Quantitative Easing and other stimulative measures, and Iran’s race for nuclear weapon capability.




At that time, the agreement between the President and Congress on extending the Bush era tax cuts looked like it would augur well for further cooperation in the then coming year of 2011….but quite the opposite transpired!  This past year, 2011, was historic in many ways, but most notably, and sadly, in the complete dysfunction of our political system to arrive at a comprehensive, bi-partisan plan for dealing with our country’s strangling debt load, huge budget deficits, ongoing housing crises and crushingly high levels of un-and under-employment.




Upon reflecting on 2011, I found myself asking quite a few “would you have believed” questions….such as:




Would you have believed if I told you that 2011 would see:


  • the end of the United States’ triple-A credit rating?
  • a so-called Arab Spring in which long-time dictators such as Hosni Mubarek in Egypt,  Ben Ali in Tunisia, and Ghaddafi in Libya would be deposed?
  • Osama bin Laden killed?
  • Iran get to the point where even the International Atomic Energy Agency would be surprised at just how close Iran is to developing nuclear weapons?
  • a tsunami and earthquake in Japan that would raise the fears of a nuclear cloud spreading across that region and possibly around the globe, and would, in turn, cause supply-chain disruptions that would have a meaningful impact on many companies across many industry sectors?
  • the European PIIGS economic crisis broaden its focus to include the possible loss of France’s triple-A rating, and would result in the change of government in Greece, Italy and Spain?
  • the head of the IMF, Dominique Strauss Kahn, accused of sexual assault, resulting in his resignation from the IMF and end of his hopes for winning the next French presidential election?
  • the death of some seemingly larger than life celebrities such as Steve Jobs, Andy Rooney and Jack  LaLanne? (couldn’t help throwing in some non-financial icons!)



Bottom line…2011 was a year filled with more than the average amount of ‘unexpecteds’ and at historic proportions!  As a result, though one could easily look at the Dow and S&P’s performance in 2011 (up 5.5% and flat respectively) and conclude that it was a relatively benign year, in fact, it was among the most volatile and unpredictable economic environments that has been seen in some time!




As you’ve seen in my emails and/or conversations in recent months, I’ve increasingly characterized my overall outlook as ‘defensively optimistic’, with more and more weight being put on the ‘defensive’ side as global risks unfold.  I still very much believe that there will be many good investment opportunities in the coming year, though the tactical approach to capturing them is likely to have to change a bit to reflect whatever market volatility we may face (more on that below).




The outlook for 2012 appears to contain the potential to match 2011 in its ‘excitement’.  Many of the same issues that impacted financial markets in 2011 still exist now, and in some cases, such as with regard to Washington DC’s inability to find common ground on key policies, it appears that things are even more heated.  The pre-election months are likely to elevate the tensions between the two parties in DC and little should be expected in terms of coordinated, comprehensive policy achievements in that time period.




Furthermore, the tensions in the Middle East are at heightened levels, in part owning to the still evolving impacts of the Arab Spring, and more so due to Iran’s intransigence to heed global calls for a stop to their nuclear weapons ambitions.  Recent verbal jousts between Iran and the US about the critical oil supply route through the Straits of Hormuz are testament to the increasing risks emanating from that region, which of course, would likely have global consequences.


Elsewhere, the recent death of Kim Jung Il in North Korea, leaves that nuclear power in the hands of strong military establishment seemingly led by the 27 year old son of the former dictator, and raises all kinds of concerns about that country’s military ambitions and its overall economic malaise (the latter likely being highly correlated to and influential on the former).




In Europe, the debt crisis continues, and though the Eurozone was  successful in 2011 in ‘band-aiding’ each crisis as it arose thereby keeping the single currency together, doubts remain as to how the severe austerity being imposed in several countries is going to be implemented in a way that is workable with the populations who are impacted most, and how economic growth can prevail in such an environment in a way to allow for paying down of their crushing debt loads.  In the US, too, there are ongoing drags on optimism, most notably, the housing sector and the job market.




But all is not dark and bleak! Recent economic data, especially from the US, has shown the US economy to remain quite resilient in the face of all of the above.  US corporations have continued to post strong earnings and improve the health of their balance sheets.  Global emerging growth continues, albeit at slower rates, though in many cases, the slowing represents less risk of ‘bubbles’ being created and therefore more sustainability in growth prospects.  US corporations have continued to post strong gains in sales in emerging countries, and outlooks remain positive on continuing demand.  Many Emerging Market countries who had been tightening monetary policies in the past year in order to ward off inflation, are now switching gears and introducing stimulative measures as a way to offset whatever slowing in growth they’ve witnessed from the overall global economy.  And finally, the markets are currently pricing equities, generally, at levels that seem to be historically appealing relative to many other asset classes.




From a tactical perspective, there are some adjustments in portfolio composition that should be considered in order to fit the current economic and market outlook.  Specifically, with market volatility in 2012 likely to remain quite high, and investors overall likely to remain quite skittish to any news that impacts the outlook for global economic growth,  there is likely to be a premium put on infusing the portfolio with very liquid assets.   Furthermore, given how times of extreme volatility appear to bring correlations between many stocks quite close together, the value of having individual stock holdings begins to be challenged by the value of holding ETFs that comprise many stocks within a sector, industry or country.   Using ETFs should provide for more efficient ‘entry and exit’ into and out of positions as risk factors change.  So in that light, I’ve been working to consolidate many of the positions that we’ve held, raising cash as a defensive measure given all the heightened risks mentioned above, but also looking to use ETFs more often as a way to express investment views.




Best regards,








(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).




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Disclosure: I am long EEM, VWO.

Additional disclosure: I have many positions in SPX, QQQ components. Positions may change at any time without notice.