The Market and the Economy

For comparison purposes, the following table presents a selection of frequently used indexes and benchmarks. The table reflects the total returns of the major indices for the past year: Index % Gain/Loss 09 S& P 500 23.5* Dow Jones Industrials 18.8 Nasdaq (high-tech stocks) 43.9 Russell 2000 (small cap stocks) 25.2  Russell 3000 (broad market) 25.5* DJ Global Equity Index 32.0 MSCI EAFE (foreign stocks) 27.7 Islamic Market US 28.1 Islamic Market World 36.5 DJ US Corporate Bonds 17.6 Lipper US Government Bonds 3.3 Lipper Intermediate Inv. Grade 14.3 Lipper Short-Term Inv. Grade 10.3 Lipper Balanced Fund Index 23.4* Dow Jones UBS Commodity Index 18.7 DJ US Select REIT (Real Estate) 28.5 Money Market Funds (taxable) 0.2 * Portfolio Benchmarks (includes reinvested dividends).

The US equity markets, as defined by the S&P 500 Equity Index, registered a rebound performance in 2009, after its disastrous 37% performance for 2008. However, the markets’ 2009 performance was, indeed exceptional, many investors still have far to go to recoup their losses. This is underscored by the fact that although an intuitive calculation of average portfolio returns might lead an investor to believe that a portfolio sustaining a 37% loss in a given year and subsequently achieving a 23.5% gain the next should have resulted in an average loss of only 6.75% (-37+23.5/2 = - 6.75) for the two-year period. Unfortunately, this is not the case.  The real loss would actually be -22.2% because, although average returns are valid for certain purposes, only annualized (and time-weighted geometric) returns present an accurate picture of an investor’s true returns. The annualized return for the S&P 500 for the 2008-2009 period is actually: 1-.37x 1.235-1.0 = -22.2%, which is the real loss for the S&P 500 for the two-year period.  More simplistically, if an investor loses 50% one year and gains 50% the next, the investor is still down 25% at the end of the second year and for the period. The annualized figure reflects the more accurate result and underscores the difference between average returns and annualized returns. Portfolio returns should always be stated in terms of annualized geometric time-weighted returns and should take into consideration, mathematically, all additions, withdrawals and costs incurred for the calculation period. This has always been and will continue to be Wealth Conservancy International’s policy. Historically, the average returns of the S& P 500 from 1871-2008, inclusively, have been approximately 10.5%, while the annualized returns have been approximately 8.8% for the period. Inflation-adjusted, the returns are 8.3% and 6.6%, respectively. Note that annualized returns are always lower than average returns. Market Forecast for 2010 and Beyond The recession has ended, probably in the summer of 2009, and the economy is rebounding, albeit, it would appear, somewhat slowly. Surface appearances may be misleading, however, as the equity markets are continuing to signal a strong economic rebound in the not too distant future. Wealth Conservancy is taking its cue from the equity markets, one of the most accurate of the economic leading indicators. Adding to our optimism, is our analysis of previous market downturns, which indicates that, except for the Great Depression years of 1929-1937, only once since the beginning of data collection on the primary US equity market (in 1871) has the S&P 500, or its predecessor, not made up for a single year’s market downturn within a two-year time period. That failure to recoup a previous year’s losses occurred in 1893. Except for that occurrence, on an arithmetic basis, all single year losses have been followed by one or more positive market years that have erased the loss over the following two years. Although this trend may simply be coincidental or random (a much more rigorous analysis is required for a determination of statistical significance to be made), for the 2008 correction to be erased within a two-year time frame, the S&P 500 would have to gain at least 13.5% in 2010. Primarily, because of improving economic indicators and principally because of our estimates of robust corporate earnings growth in 2010, Wealth Conservancy forecasts that this is exactly what will occur and that the historical trend will again be reinforced in 2010.  Clearly, we believe that the majority of Wall Street and International equity analysts’ forecasts for the US markets will err on the downside in 2010.  Nevertheless, Wealth Conservancy believes that the most serious threat to the US and world economies is the potential for another prolonged oil price spike that might commence this summer. Absent this, we are likely to see a vastly improved economic picture unfold over the next three years with US GDP growth accelerating to 3.5-4% by this year’s end and with other major economies reaping the benefits of a resurging US economy. Trends and Opportunities Wealth Conservancy sees investment opportunities in nearly all equity sectors with the caveat that many sectors’ prices have already been bid up significantly by institutions and hedge funds, e.g. infrastructure building supplies and steel. For debt securities, inflation-protected securities, intermediate term high-grade bonds and well managed high yield bond funds offer the best prospects for superior risk-adjusted returns. Global Real estate and commodities, except, we believe, for gold bullion, also appear attractive investment options.  It is important, of course, to adhere to the basics: allocate assets reasonably in accordance with each investor’s tolerance for volatility risk, maintain diversification among and within asset classes and include asset classes within the portfolio mix such as real estate, commodities, inflation-protected securities and high-yield bonds that spread risk, offer an income foundation and hedge against inflation. Insuring that securities are not purchased at excessive prices based primarily on potentially inflated earnings expectations must also be a part of one’s discipline, while purchasing individual equity securities that offer attractive and reliable dividend streams, as well as the potential for share-price appreciation also generally makes good sense. In fact this is Wealth Conservancy International’s investment philosophy. Going forward the following individual securities appear to offer attractive potential: Applied Materials, Oneok Partners and TORM Shipping. Applied Materials (AMAT), the semiconductor sector giant with a market cap of $19 B, can be purchased for $14/share and provides a dividend of just under 2%. The firm has an exceptionally strong balance sheet (2.0 quick ratio, 3.0 current ratio) and operates with a gross margin of 40+%.  The firm’s earnings are on the upswing with peak earnings anticipated in 2011. Upgraded recently to “outperform” by FBC Capital, Applied Materials appears to be an attractive investment at its current price. Another attractive equity investment is Oneok Partners (OKS), the fastest-growing energy company in the world, according to the global energy experts, Platts. Ahead only 3% thus far in 2010, the stock pays a 6.8% dividend that appears safe. Oneok, with a market capitalization of just under $4 billion, has a horizontal business structure in a very attractive business, the production, storage and transportation of natural and liquefied natural gas in the United States. We believe that OKS has excellent prospects for growth while, at the same time, yielding nearly 7%; this is a hard combination to beat for the conservative investor. Another investment that may have potential is TORM Shipping, a Danish firm whose stock currently trades at just under $13.00 at an 11P/E and that pays a 10+ % dividend. Having suffered a lackluster 2009, we believe that the stock price will rebound commensurate with a rebound in world trade, which we believe is already under way. Mutual funds that look attractive include the Cohen and Steers Infrastructure     fund and their global real estate fund. These securities provide diversification, a dividend yield of approximately 4% and the opportunity to reap the advantages of a global upturn from very depressed real estate prices. Also, the Oppenheimer’s strategic commodities fund also looks tactically auspicious because this security’s index is highly correlated to petroleum prices and will provide leveraged returns if, as we believe, petroleum prices rise appreciably later in the year. Inflation protected bond fund exposure, for example with the Vanguard Inflation Protected mutual fund, will also prove advantageous as a core holding over the next ten years. The Vanguard fund returned nearly 11% in 2009, when inflationary pressures were quiescent.  Prices will very likely rise in the future and inflation-protected securities are the best inflationary hedge available in the market place. Although Wealth Conservancy International, Inc. does not advertise on the basis of performance, our average client portfolio returned 34.5% and our median client portfolio return was 29.3% in 2009. The performance range of clients for 2009 was 9.7% to 49.2%. Updated on February 8, 2010.