QUARTERLY INVESTMENT UPDATE
4 TH
QUARTER 2006
January 3, 2007
Dear Friends and Clients,,
Enclosed is an article from the Wall Street Journal (Tuesday, January 2, 2007) reflecting the 2006 year end closing numbers on the major stock indexes. As we previously noted, this performance is especially notable for a midterm election year, which is normally the weakest period for the stock market in the four-year political cycle. Our own portfolios performed remarkable well during 2006, especially when you consider that we held a sizeable position in safe but slow-footed bonds and other fixed investments. But, after four good years in a row, can the markets hand us another winner in 2007?
Ever since our last quarterly investment update, as well as our seminar in early November, stock prices continued their surge upward, at least if you were looking at the blue chip indexes. The Standard & Poor 500 posted its highest weekly close on December 15, 2006 at 1427.09. This was the highest weekly close for the S & P 500 since September, 2000. Then, for the week ended December 22, 2006, stock prices backpedaled as traders grew weary ahead of the Christmas holiday. After the huge run we’ve had since last summer, it’s understandable that investors would want to bank some of their gains, especially as they do their year-end tax planning. Then, for the last trading week of the year, traders returned from the Christmas break in a good mood. The stock market put together two strong back-to-back sessions since the holiday, with the Dow Jones Industrial Average closing on Wednesday, December 27, 2006 at another all-time high. The markets finally settled down for the final two sessions of the year. How far the strength will carry into 2007 through, is an open question. History suggests that 2007 will be very profitable. It’s the third year of the presidential term, and there hasn’t been a losing third year for the stock market since 1939 when World War II broke out.
However we don’t want to get too comfortable. We definitely feel that “caution” should be our strategy for the immediate short-term. First of all, smaller stocks ran into some profit-taking, a sign that the huge advance off the June-July lows is starting to narrow. Other signs are beginning to show the same results-insider selling is increasing, the number of individual stocks making new 52-week highs appear to have peaked and the NASDAQ, which had led the Dow from August to November, is now lagging, which tells us that investors are not willing or are less confident to take more risk. We don’t want to read too much into these developments but some gradual leveling off is expected.
During the quarter ended December 31, 2006, we continued with our strategy of reviewing all of our portfolios with regards to asset allocation and continued to reduce our over-weighted industry sectors of stocks and mutual funds that have substantially appreciated in value in order to raise cash. Since the prices of long-term bonds and zero coupon bonds have increased, we have stopped purchasing any new bonds or bond funds for now. However, for taxable accounts, we have been purchasing other high yielding investments such as limited partnerships, preferred stocks, REITS as well as high yielding dividend paying stocks of domestic corporations from selected equity industry groups. For non-taxable accounts, such as all retirement accounts, we have continued to purchase growth and value-equity investments in selected industry groups. In addition, for all accounts, we have used some of our cash to establish or increase positions in international equity investments such as the Ishares MSCI Japan Index Fund. We feel that Japan’s economy is on the upswing again, and the stock market is cheap. Not only is the Tokyo stock market trading near its lowest PIE ratio in 25 years, but the currency (yen) is also cheap. According to the Federal Reserve Bank of St. Louis, the yen’s “real” (inflation-adjusted) exchange rate against other major currencies has sunk to its lowest level since 1985.
All in all, we continue to have a positive outlook for stocks but we will continue to take defensive measures and use any correction as an opportunity to buy more of our favorite stocks and mutual funds. We feel confident that we will have a very good year in all of our portfolios during 2007.
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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