Strategy Update – January 2011Submitted by Stonebrook Capital Management on January 28th, 2011
“Never make predictions, especially about the future.” -Casey Stengel, New York Yankees Manager, 1950s
With continuing sovereign debt problems in Europe, Chinese policy makers trying to reign in soaring real estate prices, and continuing high levels of unemployment, Casey’s admonition seems especially resonant today. Never make predictions indeed. Fortunately, investment success does not depend on predicting the future. We think investors can be successful by preparing for potential changes, employing a flexible investment policy, and adapting quickly when conditions change.
After two very strong years, stocks are no longer at the “once in a lifetime” bargain level of March 2009, but corporate earnings have increased dramatically leaving shares at reasonable price levels. We continue to be fully invested in stocks, especially in the US. This is based on attractive valuations, continuing slow economic growth, and very stimulative monetary and fiscal policies. We are more concerned about bonds, which after rising steadily for the past 25 years have recently broken their uptrend and are offering little or no value. Thus, we are reducing bond holdings in favor of less correlated asset classes such as hedge funds, frontier stock markets, and managed commodity futures. When added to portfolios, these assets historically raise overall return and lower volatility. Given valuations and expected returns in stocks, bonds, and cash, we think these asset classes are especially important now.