First Quarter 2009 Review
The markets continued their downward momentum in the first quarter of 2009. The only
difference between this quarter and last year is there was no place to hide, since U.S.
government bonds declined as well. The indices’ final tallies were staggering and
widespread. The worst performing index, the Russell 2000 (Small Cap), ended down
over 15% last quarter. That was closely followed by the Dow’s 13% decline, its worst
first quarter percentage drop since 1939. The Dow Jones World Index (ex. U.S.) and the
S&P 500 both lost 11.7%. The NASDAQ was one of the better performing indices,
losing only 3.1%. Since last September, many U.S. indices have fallen over 35% - 40%
and we have noticed that many of our newly added clients (thank you for your continued
referrals) transferred portfolios that were down in excess of 50% - 70%. This was due to
inconceivable leverage, concentrated positions, and overexposure to emerging markets
and mutual funds, one of several reasons why many brokers are jumping ship to other
firms for a huge taxpayer check and why brokerage/bank firms will be under further
pressure to either consolidate or fail.
The first quarter of 2009 was accompanied by continued volatility, which readers of our
reviews know, has been something we have stated will be with us for a long time. The
markets finished up or down by more than 2% on one-third of the trading days this past
quarter, which is truly unprecedented. You may also recall that we stated, “In the not too
distant future, the markets will rally anywhere from 900 to 1500 points.” Now that this
has happened, the question becomes, “What happens next?” Unfortunately, our answer
is, “not much.” Believe it or not, this is not necessarily a bad thing.
Our view on equities remains the same - keep an exposure, but continue to be slightly
underweighted relative to the client’s risk tolerance. Equity valuations and dividend
payouts have begun to come down as we previously said they would, while earnings
expectations are finally being reduced.
For 2009, earnings are now expected to decline 7.1%, while just three short months ago
analysts were forecasting increases of over 22%. Yes, you read that correctly. Yet
another reason LCM Capital Management does not pay attention to analysts. This
cleansing process will eventually be a good thing for our economy and future, which
substantiates our long-term belief that equities will eventually offer tremendous value but
we certainly are paying the price today for decades of excessive risk, leverage and greed,
much of which was hidden far below the surface. Short term we find it difficult to affirm
that the current rally is the beginning of a sustainable bull market. While we see signs of
credit markets loosening and debt markets thawing, LCM Capital Management
anticipates that this recovery will take much longer that what most “experts” are
predicting, as the private sector deleverages and our (global) governments leverage off of
good old-fashioned tax dollars.
LCM Capital Management continues to find tremendous value in municipal bonds and
inflation adjusted CD’s, as well as in what we consider to be high-grade corporate bonds.
These investments are offering equity like returns without the equity risk. Until this
competition for equities begins to diminish, stocks should continue to be loosely range
bound, +/-1500 points. The upside to all of this should be a long expansion with a slow,
steady GDP growth of 1%-3%. The potential negative we continue to be acutely
cognizant of is inflation. In anticipation we have been buying inflation protected fixed
income vehicles guaranteed by the U.S. government.
LCM Capital Management will continue to stay diversified across many asset classes
while focusing on the long term and the inevitable worldwide expansion and growth that
will be forthcoming despite higher global inflation.
As always, should you have any questions, please call us at 312-705-3013, or email us at
lcm@lcmcapital.com.
Thank you for your continued trust, business, and referrals.
LCM Capital Management
The view expressed reflects those of the authors as of the date of this commentary. Any such views are
subject to change at any time based on market or other conditions, and LCM Capital Management
(LCMCM) disclaims any responsibility to update such views. These views may not be relied upon as
investment advice and, because investment decisions for LCMCM are base on numerous factors, may not
be relied upon as an indication of trading intent on behalf of LCMCM. Thoughts about investing, the
direction of the market, and individual securities are based on the author’s own analysis and are not
representative of actual future performance. Investing involves risk including the possible loss of principal.
(c) LCM Capital Management
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