Investment Management Articles

4th Quarter 2011

There is not much clarity in the global economy as economic data remains soft-to-mixed and political wrangling in Washington and Europe continues, keeping confidence among investors near 2008 lows.  The pessimists are forecasting recession while the optimists are forecasting slow growth.  As a result, investors have been selling stock in anticipation of lower corporate profits.  However, there is reason for optimism, especially for investors that keep a longer term horizon in mind.

One key to successful investing is balancing the potential risks of any investment with the potential reward.  The goal, of course, is to add to those investments whose upside potential appears to most greatly outweigh the downside risk.  Looking at the current markets, equities have traded in a relatively narrow range since the summer and appear to be already pricing in a recession.  Historical valuations are relatively low as corporate profitability has remained healthy, even while stocks have corrected.

A stronger message is emanating from fixed income, with Treasuries and high-grade corporate credit fetching near-record low yields.  The Federal Reserve Chairman, Ben Bernanke has put the financial world on notice, i.e., brace for two more years of rock-bottom interest rates.  This is great news for borrowers as low interest rates are a stealth wealth tax saving the Treasury hundreds of billions of dollars in annual interest expense and may last for many years as it has in Japan.  However, this promises rough going for anyone seeking returns from fixed-income investments—from retirees to giant pension funds to companies sitting on record amounts of cash.  Hence, seeking increasing dividend yield is becoming increasingly important as a defensive dividend strategy should offer an attractive investment profile for investors in the current market environment.

The question is whether corporate earnings will remain strong enough in spite of a sluggish economy.  The results of the past three years, suggests they will as the companies which we tend to focus on, i.e., large-cap, dividend-paying, multinationals, are impressively adaptive and have managed to increase profits and dividends in difficult political and economic environments.  We expect they will continue to adapt and perform well. 

While frustrating at times, opportunities can be found for investors who are patient.  We will maintain our strategy of buying when others are selling.  We will continue to use pullbacks to add to equity positions as needed to keep allocations in line with targets while also, looking to pare back any fixed income positions that may have become outsized.

If you are interested in obtaining information about Lewis Lacey Capital Management or if you have any questions, please email info@laceycap.com or call 414-708-5383.