Outlook Newsletter - July, 2010
By James H. McBride, Managing Partner

The May Outlook voiced concerns about the short term market outlook and predicted a 5-10% market correction. In reality, the May correction took the S&P 500 down over 15% by the end of June. It has since rallied by 6.5% in July and looks to be continuing an expected recovery. We believe the markets are still in growth mode and expect to see upward momentum increase as the year progresses. We are still expecting total return for the S&P 500 to be +10% or more for 2010 which would put that index at 1250 versus its current 1096.

I have over forty years of investment experience and continue to be amazed at how often I hear “it’s different this time” used to explain why we should ignore the experiences of the past in favor of some often poorly considered prognostication of the likely future course of market action. To date I have yet to find that “the disease” is different, only the “symptoms” that describe that disease. The “doomsayers” project that the European economic meltdowns coupled with a continuing weak U.S. economic recovery will lead to a double-dip recession. However, many of us see the recent sell-off as a necessary correction of a new bull market that began in May of 2009.

We believe that the correction is over and that the markets are destined to continue their upward movement based on three factors: corporate profits continue to rise; the “bears” concerns notwithstanding, the economy should continue to recover, albeit slowly; and history is on our side (since 1929 there have been 16 market corrections, of which 14 were technically bear markets of -20 or more and the average resultant recovery in years 1-5 were 56%, 16%, 10%, 15% and 12% respectively) (American Funds –The Long View, 7/10). Of course, the continuation of significant volatility will create “the dust” that obscures much of the improvements that show a strengthening economy.

We advise staying the course and continuing to select good quality total return equities for most portfolios. We believe these good dividend paying stocks will reward investors throughout the remainder of this year. In his 7/6/10 Market Comments, Don Hays of Hays Advisory notes that corporations have $973 billion of cash and hedge funds have another $500 billion ready to invest as the economy improves. There is also $8.7 trillion sitting in bank accounts, Hays says, at virtually 0% interest rates. As worldwide investors see that the U.S. recovery is leading the world back from the brink, much of this cash will be put to work in the equity markets, especially the S&P 500 stocks, many of which have both domestic and international exposure.

The majority of High Falls Advisors’ clients are older and many need income for retirement. The challenge for us is to find income returns that will satisfy their needs, while at the same time not subjecting them to undue risk when the Federal Reserve begins raising rates. At this moment we believe equities offer the best opportunity for necessary total returns. In the final analysis, the drag on all world economies of excessive debt will keep positive progress slow. We can only hope that a combination off austerity and economic growth will be a good solution to today’s problems. We must depend on the politicians for the austerity, but we are much more hopeful that once again businesses will provide the necessary growth.

I have been troubled for some time now about the ongoing government stimulus program and fear that the current administration will choose the politically expedient action of continuing and even increasing the stimulus payments. When combined with higher taxes (sure to come), the only believable outcome will be a further increase in our national debt, which not only will mandate in increase in inflation and possibly even push us into a depression sometime in the future, when as it must, the government runs out of borrowing power.

The near-term challenge then is for High Falls Advisors to find the best combination of assets for each client’s unique circumstances which will provide the appropriate cash flow while protecting those portfolios against the ravages of future inflation and continued government deficit financing. If you are a High Falls Advisors client, sit with your individual advisor and discuss the implications of this challenge for your individual situation. If you are not an HFA client, please contact me and I will be happy to help you meet an advisor who can review your special needs and make recommendations.

For questions or additional information on this newsletter, please contact us.

The projections of returns for specific investment types are estimates and projections and therefore prone to error. Actual returns may differ significantly from projections. Your experience will differ from the performance of specific asset types to the extent that several types exist in your account, and to the extent that your specific investments perform differently than the average of that asset type. Whether any of the asset types mentioned above are suitable for your account must be determined individually, and your portfolio may not contain some of the asset types described. These views represent an appraisal of possible events. Outcomes and performance is not guaranteed. The investments listed may go up or down in value, and they are not suitable for all investors. Securities offered through Ensemble Financial Services, Member FINRA (formerly the NASD, SIPC).