October 2006

Portfolio Comments

Market View

Dorato Services

The Library: articles by Steve TeSelle

Portfolio Comments

Ten stocks you should own right now! Buy low, sell high; ride the winners; don’t catch a falling knife (don’t buy when a stock is falling); the trend is your friend; buy value; buy growth. Whether you read the newspaper, or financial information sites on the internet, or just hang around the water cooler at work, you get pelted with financial advice. Some of the advice even sounds reasonable. I mean, who wants to catch a falling knife?

Unfortunately, you have no way of knowing if the advice is any good. Even most of the people selling advice make much more money on their advice business than on the performance of their own investments. One colleague waved his hand to swat away all that advice and said, “It’s simple. Save more, spend less, and don’t do anything stupid.” Sounds reasonable; but what about the knives?

Please note: This will be the last period in which I bill in advance for management fees. Starting January 1, 2007, I will bill quarterly in arrears. This means you will not have a management fee deducted from your account in January. The next deduction will be in April of 2007.

There’s no nefarious motive here. I’m doing this as part of my planning for a disaster, which is now required of investment advisers. Billing in advance, if I were to die (which I count as a disaster) between billing cycles, my estate would owe you a refund of the management fee. That could be bothersome for everyone involved. Billing in arrears, we don’t have to worry about that problem.

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 Market View

The markets are sending mixed messages again. The US stock market is priced as though interest rates will remain low, and economic growth will chug along at a reasonable pace. The bond market, which now offers short-term interest rates up to ½% higher than rates for long-term debt, is showing signs of skepticism about the strength of the economy.

The bond market certainly has valid concerns. The housing market is finally slowing, and nobody is entirely sure how much of an impact that will have on the US economy. The price of oil has retreated some, but not much. A high oil price could act as a drag on corporate profits. And the world situation, particularly in the Middle East, looks as precarious as ever.

And yet. The US economy chugs along; companies continue to report strong profits; the Federal Reserve has stopped raising interest rates; Europe and Japan are growing faster than they have in the past; and China and India show no signs of slowing down. So the stock market has valid assumptions, too.

My view? I think bond investors are overly pessimistic about the economy. We have a reasonably good chance of avoiding a recession, and companies should continue to report decent but not exceptional profit growth. But don’t be surprised if prices bounce up and down as optimism waxes and wanes. Also, I expect some sectors of the economy, such as homebuilding, to struggle more than others.

Within the bond market, short term looks best. With long-term bonds paying a lower interest rate than cash, this is one of those times when you’re not being penalized for being conservative with your money. If you do have cash built up, what you’ll need to watch for is the changing shape of the yield curve. If the Federal Reserve starts to lower rates, or if long-term rates rise above short-term rates, which is the more normal state of affairs, then you will start to pay a price for holding cash.

After falling early in the year, the dollar has held steady. The US and Europe would like to see the dollar weaken against Asian currencies. Governments can’t get currencies to move just by hope, but because Asian currencies are probably undervalued against the dollar and Euro, I wouldn’t be surprised to see the dollar get weaker against the Yuan and Yen.

Commodities, including oil, have fallen some since the middle of the year. From this point, I still see more potential for losses than for gains. Investors stampeded into every commodity in the last three years. That usually leads to optimistic assumptions and sloppily happy forecasts of the future. I don’t think commodities will sink to the level of a few years ago, but gains from here are limited, and there’s a decent chance of losses.

Within the stock market, technology shares have started to attract attention, both from stock market investors and from private-equity investors (people who buy all the stock of a company and take it private). Both technology and health care continue to offer the most attractive returns.

As always, I recommend investors stick to their long-term asset allocation strategies and retain a diversified stock portfolio.

Sources: Economist, Wall Street Journal, Value Line

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Dorato Mission Statement:

To provide separate account management that meets the needs of each investor, and to educate and inform both clients and the general public about investment and financial issues.

Dorato Services:

• Separately managed stock portfolios
• Allocations for retirement accounts
• Small business retirement accounts
• Retirement planning
• Advice on stock options
• Assistance with tax questions
  

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The Library: articles by Steve TeSelle:

• College Savings Options
• Retirement: What's the Target?
• Fun Facts About Taxes
• Understanding Your Finances
• Risk, Anyone?
• A Primer on Asset Allocation
• Debt, Friend or Foe?
• Life Insurance Basics
• Calculating a Return
• Estate Planning
• Index Investing
• Financial Checklist

To read them online, simply click on the title. To obtain a printed copy, please call us at 303-733-4999, or e-mail me at steselle@doratocapital.com.

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"I guess we should add cow to the list, Wilson. Don't want to catch a falling cow."

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