April 15, 2007
The first quarter of 2007 was a reminder to all of us that the stock market does not always increase. During the end of February and beginning of March we noticed that the stock market can be like playing with fire – if you don’t watch it you could get burned. As if we needed a reminder – the years 2000 through 2002 are still very fresh in most investors’ minds and I doubt these lessons will be forgotten anytime soon.
On February 27th, 2007 the Dow Jones Industrial Average fell 416.02 points or 3.3% in one day. The largest one-day loss for the Dow was October 19, 1987 when it plunged 20.5%. We were far from that mark on February 27th, but it was still a significant loss given the bull market over the last four years. I was actually anxious to compare our portfolio returns to their respectable benchmarks the following day. Given the big down day, I was quite satisfied with the performance of our portfolios.
The other big story from this past quarter was the housing market and something called subprime loans. Subprime loans are typically made at higher rates to people with subpar credit – they are a riskier loan. As you can imagine, many families who qualified for subprime loans have started to feel the impact of the increased interest rates over the past few months. This situation has forced some families to miss a mortgage payment or two. After a while, the banks will foreclose on these properties. This increased rate in foreclosures during the first quarter of 2007 was one more reason market timers felt it was necessary to sell stocks at the end of February and the beginning of March.
“Cautiously Optimistic” – If you were to take a poll of all the investment professionals out there, I would guess most of them would use this phrase to describe their feelings for the stock market over the next few months. While the odds of falling into a recession at the end of the year have decreased, earnings, nevertheless, have begun to dampen. Whether this is a result of the housing slowdown, or some other factor, we do not know. Moreover, recent economic reports have forced the futures market to factor in a possible increase in the federal funds rate by the Federal Reserve – we will have to keep an eye on this as we move forward.
Before I sign-off for the first quarter, I thought you might be interested in the following fact I found in one of my online newsletters: “All of the companies in the S&P 500 are based in the U.S., but about 45% of their revenue comes from outside the U.S., and that percentage is climbing rapidly.” – FundAlarm, April 2007. Our economy continues to evolve into a greater global marketplace – our heavy weighting in the S&P 500 as well as our continued emphasis on foreign stocks will help capture this growth.
Enclosed, you will find your Portfolio Holdings statement as of March 31, Portfolio Performance summaries, a quarterly Account Management Fee Statement, and a Notice Regarding Treatment of Confidential Information. Please call us should you desire the most recent copy of our Form ADV, Part II. In addition, do not forget to notify us should your investment objectives or personal financial situation change.
Sincerely,
William A. Bullock