November 2011 – Trick or Treat?

November 1, 2011

Trick or Treat?  It looks like Mother Nature and the powers that be in Europe both had a trick up their sleeves.

On Sunday night (October 24th) European leaders announced a significant action plan for dealing with the Greece and other European country debt crisis. This confirmed what the financial markets had been hoping for and continued to fuel a record setting run in October that saw the S&P 500 jump 19.6% from its intra-day low on October 4th to its closing price on 10/28/11. On October 29th Mother Nature saw fit to hit the US east coast with a record setting October winter storm.

The Tricks happened on October 31st  which saw many locales cancel Halloween festivities due to power outages and fallen trees and cables.  It also saw the financial markets reverse course – rather dramatically –based on concerns that the European agreement, announced a mere 7 days prior, was starting to unravel.

The question is: will there be any treats for the rest of this year?

Regular readers of my Monthly Outlook will note that I have repeatedly stressed that economic indicators in the US continue to show slow, but steady growth. On Thursday 10/27 the Commerce Department announced that 3rd quarter 2011 US Gross Domestic Product (GDP) grew at 2.5%, in excess of expectations. So far, of  the 323 companies in the S&P 500 that have reported 3Q11 results, year-over-year earnings are up +24% with revenues better by 12%, beating estimates ~64% and ~63% of the time for earnings and revenue, respectively.  To me these all count as treats.

On October 18th I noted 3 upcoming key events that will dictate whether the global economy and the October rally in the financial markets continue to treat or turn into very unpleasant tricks.  Those events are:

1.       The October 23rd summit meeting of European Union leaders to formally address the debt crisis on that continent.

2.       The G20 (20 largest global countries) leaders meeting during the first week of November.

3.       November 23rd – the deadline for the US Super committee to put forth a plan for $1.2Trillion in deficit reduction.

While an agreement was reached at the EU summit and the market initially liked the results, doubts have started to surface.  This week the G20 leaders will have an opportunity to reassure the world that they are committed to fixing the European debt crisis. I am confident they will announce that commitment – whether that satisfies the market is the question.  These first 2 events are focused primarily on the situation in Europe and while important I don’t believe their outcome will, in and of itself, decide the fate of the US economy.  The plan of action to reduce the US deficit due on November 23rd is the key to near-term US economic activity.  If the Super committee doesn’t put forth a credible plan that can actually pass a vote in Congress then the risk to US economic growth increases considerably. If they manage to find a reasonable compromise then I think the factors are in place (tons of cash on sidelines, corporate profits & balance sheets) for economic activity to accelerate and financial markets to increase.

A quick discussion of investment volatility vs. risk is appropriate.  Volatility is price fluctuations caused by assets being bought and sold.  Volatility can affect prices for good assets and bad assets alike.  Risk is the potential for permanent loss of capital.  It is quite possible for an investment to be volatile without necessarily being particularly risky.   Conversely, some investments are not very volatile but can be extremely risky.  An example of the former would be Johnson & Johnson.  JNJ was founded in 1886 and went public in 1944.  It has 27 consecutive years of adjusted earnings increases and has raised its cash dividend paid to shareholders for 49 consecutive years.  Clearly not a risky company. However, over the past 52 weeks its stock has traded from $57.50 to $68.05 per share (it closed @ $64.39 on 10/31/11) – a range of 18.3%.  An example of the latter would be a private oil & gas drilling program.  These type of investments have low volatility as they are not actively traded but are quite risky in that either they find the natural resources and the investment pays off or they don’t and the investment is a bust.

In the current (and foreseeable) investment climate I think volatility is going to remain high and is something we are all going to have to learn to live with.  However, risk can be managed, as it always has been, by investing in high-quality investments with good long-term track records and diversifying portfolios across multiple asset classes.  This is the approach we have taken with your portfolio and will continue to do so.

Please contact me if you have any questions or concerns.  Also, feel free to pass this along to anyone who you feel it would benefit.

Although the information included in this report has been obtained from sources we believe to be reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.


Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

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