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HERON FINANCIAL
GROUP, LLC
FINANCIAL MARKETS
COMMENTARY
May 20th,
2010
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Much churn,
little direction for US stocks
After reaching a 19 month high on April 26th, US stocks have endured the
"flash crash" on May 6th, political unrest in Europe over the
near default of Greece, the collapse of the Euro against the dollar,
which sharply drives down commodity prices. This chart of the
S&P 500
looks eerily similar to market action back in September 2007 around the
failure of Lehman Brothers.
We all know
what happened after that - US stocks declined another 20% to a thirteen
year low.
Notice that while the current environment feels as scary as September
2008, the actual magnitude of the price swings is dramatically
less. Between September and November 2008, the S&P 500 fell
41%, which qualifies as a "crash." The current decline,
as we near the lows for the day, is 11.3% - a garden variety
"correction."
As we observed April 20th, the S&P 500 was already up 10% on the year
which was ahead of our forecast of 8% for all of 2010. At this
moment, the S&P 500 is down 2.2% on the year. European markets
are down 1.5-11.1% YTD and Asian markets are down 4.2%-17.8%.
China, which was last year's top performing market, is predictably this
year's worst performing market.
Investors unfortunately over-react to recent history. According to
the Investment Company Institute, even as the S&P 500 gained 70% in
the 12 months through March 2010, mutual fund investors were net sellers
of mutual funds, withdrawing $8.6 billion. Following the May 6th
1000 point decline, investors withdrew another $14 billion. In
other words, investors generally "Buy high and sell low."
As we seen in this long term (65 year) chart, the last 10 years of flat
returns in US stocks is the exception rather than the rule.
We made
these comments on January 22nd, 2010 regarding a 5% pullback:
What would it take to drive sharper market declines beyond what we
already saw this week?
1. Earnings coming in worse than expected - so far not
an issue
2. Leveraged investors facing margin calls - so far not
an issue as leverage ratios are down sharply compared to a year ago.
3. Economic news that implied a "double-dip"
recession. So far the world's economy is recovering at a moderate
pace, with Europe and the US bringing up the rear. We see
"slow growth" but not "no growth" or "negative
growth."
Our analysis remains exactly the same, strengthened by a net gain YTD in
the US of 500,000 jobs, a 22% decline in the price of oil from April
6th AND , just announced. the Senate moving forward on bank regulatory
reforms with a 60/40 vote.
Strategy
Bottom
line, if you have cash that could be in stocks because you don't have an
immediate need for those funds in the next 1-5 years, you have an
immediate opportunity to buy good companies at excellent discounts to
long term valuations.
If you're a current client drawing on their portfolio for retirement, let
us just remind you that your monthly "allowance" comes out of
relatively stable bond funds, which we reload periodically from your
equity investments when stock prices are higher.
As always,
please don't hesitate to call with questions and concerns.
Yours sincerely,
David
Edwards
President
The HERON FINANCIAL GROUP Financial Markets
Commentary is published following month end and when market
conditions require comment. The views expressed in this letter represent
HFG opinion and strategy as of the date published and can change at any
time upon receipt of new information. Data quoted in this letter are from
sources deemed reliable, but no guarantee of such data is implied.
HERON
FINANCIAL GROUP, LLC, is an SEC registered investment
advisor providing fully managed investment and wealth management services
to individuals, families, trusts, defined benefit plans and
corporations.
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HERON FINANCIAL
GROUP, LLC
www.HeronCapital.com
(800) 99-HERON
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