AUGUST NEWSLETTER

Market rallies sure are fun and some sectors in particular have been, as they say on Wall Street, "on fire." After the markets lows we saw last March we’ve enjoyed some tremendous gains in both the stock and bond markets and it can be very tempting to jump in and try to catch some of these huge returns. The problem is the biggest winners have been pretty consistently in the riskiest parts of the market. As an example, while the S&P 500 posted a solid gain of close to 14% through August this year, over the same period China was +45%, Brazil +48% and India +60%! Those eye popping numbers really are tempting, however, take some time to think a bit and get some perspective before you try to play the game.

Consider this, if anyone had suggested you invest in any of those three markets; China, Brazil or India, back in March you’d very likely have run in the other direction. So, why would you want to buy them now when they are so much more expensive? Granted, signs of recovery in the global economy are emerging but we still have a very long way to go. In addition, I think a reasonable argument can be made that changing consumer buying habits, especially in the United States, will not be beneficial to the economies of any of the "top performing" countries.

For a further reality check let’s go back and consider where you’d be if you’d owned these indexes last year. Assuming you’d bought your positions at the start of 2008, by the end of the year your China investment would have lost -65%, Brazil -41% and India -52%. Keep in mind that there was a large amount of bad economic news that hit the markets in 2008 versus the relatively limited amount of good news we’ve seen so far in 2009. One might well argue that the 2008 losses were justified given the amount of bad news but the gains this year are somewhat harder to explain given the considerably more mixed economic news we’re getting now.

Thoughts you would have done OK by just sticking with your positions don’t necessarily hold water here either. Consider if you owned our year-to-date 2009 winner India since the start of 2008. If you invested $100,000 in the India Bombay Sensex index on January 1, 2008, by the end of 2008 your investment would have lost 60% of its market value, leaving you with about $40,000. While you’re up a whopping 60% so far in 2009, it still doesn’t get you back to where you started as the 60% gain on your $40,000 only brings your investment value back up to $64,000. Unfortunately in volatile markets like these the math in calculating your actual returns is not your friend.

The point here is to always exercise caution before you try to play in markets that appear to be "on fire". Volatility and unlucky (late) entry points can lead to very severe losses. Think through your risk tolerance and timing before you dive in, if you dive in at all.

Randy Gridley

August, 2009