QUARTERLY INVESTMENT UPDATE
2 ND
QUARTER 2006
July 3, 2006
Dear Friends and Clients,
The Second quarter has passed without a great deal of conviction by most investors as far as which direction the overall market is heading. Stocks and bonds struggled during the quarter as concerns over inflation, interest rates and the economy pounded markets worldwide, with the major stock and bond average indexes slipping into the loss column for the year earlier last month before finally rebounding this past week, with the blue chip S & P 500 posting its best weekly percentage gain since January. You would think that the correction is over after last Thursday afternoon’s Federal Reserve announcement of increasing their target for the federal funds rate to 5.25 percent, as had been widely expected. Before the announcement, the Dow was up approximately 80 points but ended the day up 216 points. Why? Is this the end of the string of interest rate hikes? We’ll know more details within the next several weeks. However, in the news release that accompanied the announcement, Ben Bernanke said the economic outlook will determine “any additional firming that may be needed.” The “any-may” combination leaves the door open to the possibility that further increases may not be needed. In other words, Mr. Bernanke did weaken the case for yet another rate hike at the central bank’s August meeting. In short, we may have seen the last interest rate increase unless of course inflation continues to run uncomfortably hot.
Even though we will discuss this issue in greater detail at our upcoming November Seminar, it’s important to point out why we felt that the purchase of long-term bonds and zero-coupon bonds during the past six months added more value and less risk to our portfolios. First of all, we analyzed all of the portfolios on an individual basis and determined that even a more aggressive 100% equity strategy inside an IRA could use the benefit of some long-term debt which would, at least, generate fixed income at current rates. In addition to the fixed income aspect, we feel that there is value in long-term bonds as well as zero-coupon bonds that will hopefully convert to long-term capital gains.
Once interest rates are stabilized and investors actually anticipate a “cut” in interest rates, then bonds and stocks should both advance. In the meantime, we’ll continue to view this back-and-forth action as part of the necessary base building process before the next bull market can take off. We’re not convinced it’s going to be all uphill for the rest of the year just yet without another possible pullback.
During the quarter ended June 30, 2006, we continued with our strategy of balancing our portfolios in favor of bonds or bond-like substitutes, especially in those taxable portfolios that virtually consisted of all value and growth type of equity stocks. As conservative, long-term investors, we have continued to reduce our over weighted industry sectors of stocks and mutual funds that have substantially appreciated in value to raise cash. We’ve been purchasing long-term bond funds, zero coupon bond funds, limited partnerships, preferred stocks and convertible bonds as well as selected individual stocks to achieve our goals.
In addition, we have been re-balancing the IRA portfolios from a very aggressive equity strategy and using the proceeds to buy into some long-term treasury bonds. We feel that long-term bonds have stabilized enough and can provide us good income and less risk to all of our portfolios. So even though we invest in primarily selected individual stocks that have value and growth characteristics, we feel that this is a good time to reduce our risk by investing some allocation of our total portfolios in income-producing security classes such as bonds and, we feel confident that this step will give us more assurances as conservative investors to achieve our goals.
All in all, we continue to have a positive outlook for stocks but we will continue to take defensive measures and to use any correction as an opportunity to buy more of our favorite stocks and mutual funds.
Again, thank you very much for the trust and confidence you have placed in our firm and it is always appreciated. Please contact me with any questions or comments.
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