The Two-Minute Portfolio Manager

It's a short attention span world, and while we often wax poetic about investment topics we feel passionate about, today we will summarize our world markets view in less than the time it takes to heat up the dinner your family ate two hours ago (a scenario most familiar to this writer).

1. The U.S. stock market's valuation (cheap or expensive) is always a hotly debated topic. We grow more confident by the day that the broad market is closer to a major top than some new major liftoff point. But as in 1999-2000 (which this reminds us of), you don't know how far and how long the current 5-year upswing will last. And when it starts to peel off and fall, we don't know if it will be everything falling together all at once or a slow bleed that separates winners and losers. It's not our job to guess, but rather to invest and constantly balance reward potential with risk of major loss. So regardless of what we think, the investment process is about what we are trying to accomplish for each client, not what the market may or may not do. Enjoy the ride but have a plan for the eventual plunge.

2. Within the market, small and mid-cap tech stocks (especially internet stocks) are getting ahead of fundamentals. Real investors buy the companies while speculators buy the stock. The Russell 2000 small cap index has a price-earnings ratio (a popular valuation measure) of 83. A year ago…it was 34 (source: Wall Street Journal).

3. For months it has been increasingly difficult to find attractively valued stocks…but they are out there, primarily in industries that lack glamour (again, shades of 1999-2000).

4. Emerging stock markets continue to cave in, following last year's price debacle (greatly underperforming major U.S. indexes). There is clearly a link between the fortunes of these markets and the actions of U.S. policy makers (i.e. the Federal Reserve Board). We think the same link exists with the Fed and the U.S. market, but investors have not panicked about that yet. In time, they will.

5. Bonds are an accident waiting to happen, regardless of what type of bonds we are talking about. Again, who knows when, but the 10-year U.S. Treasury Bond rate, currently around 2.75%, appears to be preparing for an eventual move up through 3.00%. As we have been saying around here, "3.00% will get you 3.50% to 3.75%." Our chart work indicates that at some point rates will drift higher and not come back down for a long, long time. That is a key part of the thesis expressed in our major research paper released two months ago (The Sungarden Study) which is available by request at the Contact Us page).

6. Commodities are today what commodities are most of the time - essential elements of the real economy whose prices fluctuate frequently and sometimes wildly (gold, oil, etc.). We have our favorites in commodity-related areas but they are typically considered "guests" in our portfolio, not "residents." In other words, we are more opportunistic in these areas as we believe that large price swings are inevitable.

7. All of the above can be summarized in one sentence ("The One Sentence Portfolio Manager?"…oh no, that's called tweeting): the Fed has put a safety net around world markets, which has encouraged out-sized pursuit of risk by many investors (not us), and will continue…until it stops and heck breaks loose.

© Sungarden Investment Research

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