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Market Comment August 18, 2011

August 20, 2011

This is your captain speaking. If you could please return to your seats and fasten your seatbelts, air-traffic control has indicated that we should expect some moderate to heavy chop ahead. We do not anticipate significant delays in reaching our final destination. We will let you know when it is safe to move about the cabin.

Passengers that are not big fans of turbulence at 30,000 feet may find some comfort in the message. In the communication, we find reassurance that while some bumps likely lay ahead, the rough spots are anticipated and ultimately should not impede us reaching our final destination.

 
We have entered into a rough investing climate. Last week saw the markets move in swings that we certainly can term abnormal – last week alone, held two of the 11 biggest point declines in the history of the Dow Jones Industrial Average. While the markets would appear to have settled out, we have many reasons to believe that moderate to heavy “chop” remains ahead of us.
 
 
John Hussman is an economist and fund manager whose opinions can be characterized as intelligent, robust and lacking conflicts. In his August 15 weekly comment (available to public at www.hussmanfunds.com), Dr. Hussman writes:
 
“The composite of recession warning evidence we observe here…falls into a Recession Warning Composite that has been observed in every recession since 1950, and has never been observed except during or immediately preceding a recession.”
 
Furthermore, numbers this week suggest that slowed growth levels are being seen in China, Germany and the UK; and it is well within the realm of possibility that our own anemic GDP growth numbers could see some downside revisions towards a contraction level. This note, though, is not a call to don your parachutes. Rather let’s buckle our lap belts and stay on course:
 

 

1) By focusing on developing portfolios that are appropriate to time frames and specific goals (have to now / have to later, want to now / want to later matrix) Terra Firma Financial clients should feel the freedom to maintain confidence in their plan.

 

2)Markets may adjust valuations and even begin recovery before a recession has been identified, making market timing based on economic forecasts a dangerous game. Said another way, breaking out the parachutes introduces another whole new set of risks to individual investors (and airline passengers!).

 

3) Above bullets notwithstanding, staying the course may not always be the appropriate strategy.  Unlike passenger air travel, it is not uncommon for investor destinations to change for any number of reasons making consistent monitoring and communication important.  Similarly, portfolios that may have been invested without an eye towards time frames, required cash-flows and goal specific risk “appetite,” may find short term rebounds a prudent time to re-group and modify the flight plan.

 

 In an effort to serve our clients better during a period of what we anticipate will be elevated volatility, we will be posting portfolio summary reports to your client portal on a more frequent basis than normal. We do not want to create an overt focus on relative returns, as we do not believe tracking an index is the appropriate way to measure success for your family; however, our hope is that these reports will serve as your “seat-belt” to help you keep your seats during the moderate to high levels of “chop” that we anticipate in the markets.
 
 
As always, we appreciate the high level of trust and confidence that you have placed in Terra Firma Financial. It is in times like these that we treasure your relationship. If you are currently outside of the Terra Firma Financial community but would find value in a review of your portfolio, we would be glad to discuss your situation in greater detail.

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