OUR INVESTMENT STYLE

Throughout the history of the US stock markets and other stock markets globally, business cycles have created long periods of time where equity prices essentially went flat, moved within a broad trading range, or provided negative returns. In the US, these periods include 1900 to 1920, 1929 to 1945, 1966 to 1982 and of course 1999 to present. In other words, over the last 110 years in the United States, 62 of these years have been time frames where the markets were in markets that provided a lot of volatility, but in the context of sideways markets, with much pain and heartache for investors. The great Bull market of 1982 to 1999 provided Wall Street and investors with the greatest stock market in our nation’s history. This bull market drove equity prices to a point so high, over 11,000 on the Dow and 5200 on the Nasdaq, that you could literally draw a line from point “ B”(1999) to any point “A” going back to the Great Depression and make an argument for “Buy and Hold”.

This mentality, while it worked great from 1982 to 1999, has not been an effective strategy most of the time, and is a dangerous mindset for all investors unless their time frame is at least 20 years. The problem that we have with this strategy is that strategic and tactical asset allocation, combined with proven timing tools, can not only reduce volatility, but increase overall returns, so that “buy and hold” doesn’t become “buy and mold” or “buy and rot”.

What made our market so strong from 1982 to 1999 was a combination of factors that are instructive for investors. Interest rates peaked in 1982, with many yields over 20%. As rates fell, the cost for capital fell for companies, and equities became more and more attractive. Furthermore, demographic trends played a strong hand, as the baby boomers, which are 40% of our population, bought their first and second homes and cars and reached their peak earning years. Finally, we had tax rates that were cut dramatically under Reagan, and helped foster Capital Investment, which is the single biggest determinant of job creation, not to mention, more of a pro-business outlook as opposed to the administrations of Nixon, Ford and Carter. Under Bill Clinton, the “peace dividend” took pressure off the economy as Clinton (post ’94) lowered tax rates as well. It was the perfect storm for equities.

Our mandate is take advantage on a global basis, of those markets, areas, countries and companies that benefit from similar positive scenarios, be it demographics, interest rates, tax rates or pro-business administrations. Governments and policy have a bigger impact on prices for equities, commodities and bonds than any other single factor and it’s rather surprising to us that policies do not play a bigger part in investment decisions than they do. One simple model that we use combines interest rates (both in direction and nominal levels) and strong technical factors(is this market trending positively) with pro-business administrations and provides an excellent roadmap for strategic investment allocation. We use these types of tools and models to form an asset allocation including bonds, currencies, commodities and equities that is both strategic and tactical in nature. We feel this Global Macro approach will again, increase returns and reduce volality, so that investors aren’t left “rotting and molding”. We also believe that moving forward, investors will need to broaden their scope when it comes to equities, as many emerging markets have less legacy costs and entitlement hurdles to overcome. They also have younger, growing populations that have technology gaps to be filled. This also combines with global currency destruction to make commodities very attractive moving forward. That being said, global shocks from developed countries and financial crisis lurk. Therefore we believe that both strategic asset allocation AND market timing tools need to be deployed. The old days of large cap, mid cap, small cap, international and bonds may be behind us.

We hope the above information is helpful and informative. We look forward to discussing any specific questions you may have in further detail at your convenience.