7/1/2008 - Market Decline Continues

Equity Overview
The US and world markets sold off sharply in June bringing a two month rally to an abrupt end. Domestically, the DJIA was the worst major index performer recording a monthly loss of over 10%. For the quarter the Dow declined 7.44%. It was its third straight quarterly decline in a row. Small cap stocks were the lone equity outperformer for the quarter, only declining by a quarter of 1%. Through the first six months of 2008 all three major domestic indices, the Dow, the S&P 500 and the Nasdaq were all down double digits at -14.44%, -12.83% and -13.55%, respectively.

How broad has the market decline been? Well, even Warren Buffett has not escaped its fall. His Berkshire “A” shares have declined almost 11% or almost $23 billion dollars year to date. Furthermore, publically traded equities in the Berkshire Hathaway holding company have similarly shed in aggregate in excess of $4 billion dollars in market capitalization over the past six months. Losers include American Express, Wells Fargo, Coca Cola and USG Corp. However, these losses were somewhat offset by gains in Burlington Northern, Conoco Phillips, Anheuser-Busch and Wal-Mart. But don’t feel too sorry for old Warren. His company still sports a market cap of over $210 billion, more than twice the market cap of Citigroup, the world’s largest bank. Rest assured, he is not selling into market weakness but utilizing this downward volatility to add to his holdings including the badly battered financial sector.

Internationally, developed and emerging markets have declined as well, recording monthly losses of 9.06% and 11.31% respectively. Inflation and high oil is weighing on world markets, and in many cases, far worse than the United States.

Without sounding like a broken record, once again these markets point out the necessity of proper asset allocation. By having a portion of your portfolio allocated to small cap stocks (down 4.57% through the first six months), fixed income (up anywhere from ¼ of 1% to over 4% through the first six months) or even alternative investments like commodities and natural resources, your net returns through the first six months could be better than the large cap indices above. How your portfolio holds up in bear markets is as important to your long-term success as how well it does in bull markets. Minimizing risks is equally important as maximizing gains.

The Economy, Interest Rates & Commodity Update
The Fed kept rates in tact at their meeting last week despite market rumors that it would actually raise short term rates. Consequently, the US dollar weakened and commodities such as oil and gold took off. Gold ended the quarter down $2 to close at $932. Oil had a parabolic rise during the quarter with a 34% increase to above $142 per barrel.

Oil’s sharp advance is having an undeniably negative effect on world equity markets. To make matters worse, ABC news is reporting this morning that Israel is planning for a potential airstrike against Iran. This will only muddle an already tense situation in a geographically vital region going forward. High priced fuel is starting to have an effect on public sentiment and behavior. More Americans than ever before are in favor of previous taboo subjects such as ocean and Arctic drilling, and even nuclear power plant development in addition to the already embraced alternatives such as wind and solar power. Companies operating in all of these environments should continue to benefit from this shift in public opinion.

Even with the excessive commodity and food inflation we have seen, there still are some positives in the economy. Unemployment, though higher recently, is still well below levels reached during other periods of economic slow-down.