Tuesday, August 09, 2011

A Few Thoughts

Since our last blog posting on August 2nd, global equity markets have undergone a remarkable sell-off and have now retraced most of the gains made after Ben Bernanke hinted at QE2 about one year ago. Given the risks to the economy that we have discussed in past blog posts, perhaps these levels in the market are more reasonable and offer a healthier investment environment for the future. However, such a sell-off is disconcerting and requires our full attention.

While the failures of political leaders in Washington and the actions of Standard & Poor’s in downgrading United States sovereign debt would seem to be the immediate causes, the markets may be more influenced at this moment by the potential collapse of the Euro-zone and the likelihood of a Lehman-like systemic failure of the European financial system. The effects of such a failure on the U.S. financial system, while believed to be less severe than the financial crisis of 2008, are still relatively unknown.

The sell-off over the last few days has been swift and relentless. It is easy to surmise that one or possibly several significant funds or financial institutions may be under duress and undergoing a liquidation. There is no news of that at this point, but perhaps we will learn more when markets find new support levels. Also, we can’t forget the potential for computer or “machine” trading, which accounts for a significant amount of daily volume, to create volatility. While the decline in equity markets that started three months ago has legitimate fundamental reasons, forced or automatic selling over the last few days may be creating distortions to prices.

At this point our equity holdings are faring better than the market, as expected, and, of course, our cash and bonds are stable. Given our still-sizable cash position, we are looking at several, strong, dividend-paying EVA companies we would like to either buy initially, or add to existing positions. However, we are in no rush to “buy the dip” at this point.

Repeating the conclusion of our August 2nd blog:

We have been consistent in our message for the last several years, avoiding the impulse to anticipate every up or down move in the market based on the next government policy. We are working very hard to remain alert to potential downside risks while prudently investing our clients in the best, low-risk, wealth producing companies we can find. We continue to invest in EVA-producing companies with strong balance sheets and good dividends. We are being extremely careful to protect our client assets and continue to provide thoughtful insight via our fiduciary duty as investment advisors.

Stay tuned; and thank you for your continuing confidence.

Peter and Jack Falker

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