During the past year, the world has been affected by a number of crises, some of which have been self inflicted while others by the hand of Mother Nature. From the European debt crisis (self inflicted) to Mid East tensions and the Japanese earthquake/tsunami, the world has seldom seen so many crises in such a short period of time. Though each of these events has caused short term, sometimes significant, declines in global stock indexes, the overall bias of stock prices throughout the last twelve months has been decidedly upward. This reconfirms that – though stock prices may be driven by psychology over the short term – over longer periods of time, the direction of stock prices is driven by corporate profit growth.

Throughout the last year, the global economy has continued to revive allowing corporate profits in most sectors to flourish. This is in no way a normal economic expansion and could be best described as “lumpy”. There are some sectors – such as housing – that have not benefited from this revival, while there are others – such as industrial and technology companies – that have demonstrated significant growth. Fortunately, many more sectors than not have been the beneficiary of this revival. This has allowed the global economic revival to stay on course and corporate profit growth to continue despite the crises. Ultimately, investors continue to recognize that stock prices are a function of the underlying company’s profit growth and, regardless of short term psychology or crisis, continue to bid up the price of companies with stellar earnings. In this way, stock markets are somewhat efficient.

Our forecast is for further progress in this economic revival throughout 2011, specifically in the sectors of energy, industrials, technology and materials. This should lead to higher stock prices in general and particularly good performance in these sectors. In addition, we continue to maintain that continued growth in global economies will result in higher interest rates (rates have already doubled in the past 5 months). This should further improve the ability for the fixed income investor to find increasingly attractive returns in individual bonds and money markets.

There will no doubt be a number of unpredictable (and some predictable) crises in our future, but hopefully they will be spread over longer periods of time. In the meantime, we will continue to be prepared to face each one carefully and determine its effect on your investment portfolio. Keep in mind that though we are optimistic about the current economic environment, we continue to use risk management tools on your portfolio, such as your allocation to stocks, sector management and carefully placed stop loss orders.

We hope this note finds you well. If you would like get together to discuss your portfolio, or if you have experienced any significant changes in your financial situation that we may be unaware of, please let us know at your earliest convenience.

Sincerely,

James E. Demmert
Managing Partner