Over the past two quarters our research has indicated that the global economic recovery would likely slow its pace. This reduced economic growth is now being realized and is causing stocks to trade in a narrow range and interest rates to reach levels not seen since the depth of the last recession. Does the recent economic slowdown portend the onset of another recession? Or is it simply a temporary phenomenon? Moreover, what can we do to enhance our returns during this period?

Though the recent slowdown in the global economy is disconcerting, our research and that of our research partners shows no evidence of another recession at this point in the cycle. This perspective is important and has significant implications for the future direction of stock prices and interest rates. If this is truly a temporary slowdown, stock prices may continue to trade sideways for a while longer, but will eventually break out and go significantly higher as investors recognize that a recession has been averted… the patient stock investor will be handsomely rewarded. Additionally, interest rates will likely rise significantly. This in turn will make money market and bond yields much more attractive than today’s low yield environment. If we are correct in our assumptions, this period will be very similar to 1994 – stock prices and interest rates acted similarly to today’s market, only to soar higher once the economy was back on track. We look forward to these positive changes but there is uncertainty in regards to the length of time it will take for them to come to fruition. In the meantime, we need to do all we can to enhance your returns.

During this period we are using a three-pronged approach to enhancing your returns while we wait for stock prices and interest rates to rise. The first approach is to add high quality utility companies to your portfolio. These types of stocks tend to be less volatile than the overall market. Therefore, as the market continues to see-saw back and forth, these positions will likely be more stable. Moreover, they pay high dividend yields in the range of 4-6%. The second approach is to add companies to your portfolio that are structured as “Master Limited Partnerships.” Not to be confused with the limited partnerships of the 1980s, these companies distribute all of their earnings as a dividend, providing investors with attractive returns. These stocks trade on the New York Stock Exchange and have dividend yields of 6-8%. Our last approach to enhance your returns during this temporary phase is to buy very short, high quality bonds that have yields significantly better than money market returns. These are not easy to find but we will continue our search on your behalf.

We are confident that these approaches will enhance your overall return during this period of temporary economic slowdown. If our research suggests that the economy will further deteriorate and a recession becomes more likely, we will reduce your stock exposure, change your sector exposure and will continue to have our stop loss order strategy firmly in place. Again, we do not think that this scenario is likely but will be monitoring the economic data closely and be prepared regardless.

We hope that this update finds you well. If you would like to get together to review your portfolio, please phone us at your convenience.

Sincerely,

James E. Demmert
Managing Partner