To say that this was a good quarter in the stock market would be an understatement. The market started the new year with a strong upward move during the month of January and did not correct the entire quarter. Both trading volume and volatility remained low during the period. To put this move into historic perspective, since 1928 or 84 years, the market has had one first quarter like this only eleven times, or thirteen percent of the time. To those of you who have investable cash in your account, I assure you the quarters ahead will provide plenty of opportunity.

If the market continues with an upward bias, it will be interesting to see if money rotates out of bond funds and moves into equity funds. Should this rotation begin it would be another bullish sign for stocks. The likelihood of this rotation occurring is dependent on the economic data. If the data continues to improve, the chances of an interest rate hike goes up. An interest hike is short term negative for stocks but long term negative for bonds. Thus, if this process begins I would also expect an increase in trading volume, also bullish for stocks.

With first quarter earnings due to be released in a few weeks, it will be interesting to see if corporate CFO’s and CEO”s have positive forecasts for 2012. These forecasts from the top companies in each industry often provide a guide for the year. Last year the forecasts were at best neutral, and the market ended up flat for the year.

I did not expect this booming start to the first quarter. Going forward, I would not suggest chasing the market, although I do recommend buying on corrections.

2011 was a very volatile and disappointing year for the US stock market. What’s notable is that most other world markets, with the exception of a few small ones, were down substantially more for the year. Entering 2011, expectations were high for a continuation of the economic recovery around the world despite deleveraging, residual debt and credit concerns. Although corporate earnings were quite strong in 2011, the investment landscape was driven by fear and anxiety. Fear that an over leveraged European bank may implode, and anxiety that a small or medium sized country in Europe may collapse and total mayhem would break out on the streets.

Looking into 2012, the positives and negatives seem to line up very close. The negatives include a systemic banking crisis in Europe, a true double-dip recession in the US, a hard landing in China, and a Middle East Crisis. The positives include Europe moving toward a resolution of its debt crisis, the US striking a budget deal or becoming fiscally responsible, and a housing/jobs recovery. My sense is that we will muddle through these issues with some resolved and unresolved. It’s very difficult to look out more than a few days in this type of market, although for the first few months of 2012 I am looking for more of the same; high volatility with equities muddling slightly higher.

I think it is highly unlikely that the United States Government would let the state of Rhode Island go under or default on its obligations; even more so now in this economic climate after seeing the effects of the Lehman collapse on financial markets. Likewise, I believe it is unlikely that the European Union will let Greece or any of the countries in Europe go under.

However, just as the Troubled Asset Relief Program (TARP) took time to be put in place in this country, any European effort will likely take even longer to establish. To put things in perspective, on a percentage basis, the current downturn has emulated the corrections in the first quarter of 2009 and second quarter of 2010. Until some sort of solid plan is in the works, or put in place to address the European fiscal issues – all market rallies will be met with selling. It is impossible to call the exact bottom of the market although some signs to look for include the following: down market openings and big up market closings for consecutive days, (presently we have the opposite), bad news announcements followed by large market up moves, large insider buying by CEO’s, large increase in merger/acquisition and share buyback programs as stock are cheap, and lastly seasonality favors October market bottoms.

This quarter all equity classes got smashed. The big intraday swings suggest a turn in one direction or the other is not far off.

It is very common for the stock market to have one negative quarter during the course of a calendar year. The late 80’s and 90’s were the only years when the market had four consecutive positive quarters. Since 1976, fifty percent of the years, the market was negative for one quarter during the year and ended up positive at year end. Many of these years when the market had one negative quarter the return on investment at year end was greater than ten percent. What continues to amaze me are the markets amazing resiliency. This quarter, once again, the usual post crisis issues surfaced: Greece bailout II, poor jobs numbers/housing data, and the end of QE2. Clearly, low interest rates and strong earnings are contributing to the market corrections being short in time frame and shallow (less than 10 percent). Looking forward, July is the beginning of earnings season and August is the deadline for the budget. When the sentiment becomes very positive- the market corrects, and when the sentiment becomes very negative- the bargain hunters show up. This pattern has been going on since 2009 and I do not expect it to change. The excesses of the crisis rest in the hands of the consumers and financial sector. In terms of the stock market, these excesses have already been accounted for in terms of price. Corporations are aligned with capital and excess cash flow. If housing prices stabilize, gas prices and unemployment decline- intermittent growth may turn to steady slow growth; providing a positive track for stocks.

Quarter in and quarter out, since approximately 6600 on the Dow Jones Industrial average, the stock market has faced many head winds on both the domestic and international front. Market pull backs and mini corrections (less than 10 percent) have occurred although the overall trend has been positive. Not too much, but just enough bad news has emerged to keep the Federal Reserve from raising interest rates. Relatively low volatility, low interest rates, and great corporate profits suggest that the market is in a sweet spot and we should put our worries behind us. This is partly true, however, there is too much unnatural support for the economy including: a 10 percent GDP deficit, massive quantitative easing, taxpayer support for 95 percent of all new residential mortgages and 0 percent interest rates. The Federal Reserve seems to believe the reflating of asset prices will resolve our issues. The jury is still out to see how the market will handle less manipulation going forward. Stock prices have risen on record earnings and Fed intervention despite strong head winds. However, trees do not grow to the sky, thus a watchful eye on both the micro and macro data remains imperative until we stand on our own. If we are truly in a self-sustaining economic recovery, we will be able to remove all financial steroids, and the economy/markets will handle it with grace; as those who invested will continue to be rewarded. Although, if the pending intervention wind down is rocky, share prices will be at risk which could present a buying opportunity. Lastly, money continues to flow into the US stock market, quite frankly, because no other viable option presently exists. Let’s just say it’s complicated, so please stay in touch.

In April of 2010 I wrote in my quarterly report that I thought the S&P 500 Index
would return to 1270 by the end of 2010. This 1270 number on the index was the level
the market was at the day before the Lehman Brothers collapse occurred. My thinking
was that a crisis was avoided and that the market would reprice itself back to this level.
My father, who was an economist for the government, taught me in my very early youth
that interest rates and earnings drive stock prices. Or to put in simple terms when interest
rates are low and earnings are growing the market historically trends higher. In the first quarter of this year it was clear that interest rates would remain low. The second part of this equation or the earnings question seemed to be the surprising factor for 2010. From
Whole Foods to Apple and Norfolk Southern Railroad earnings, estimates across most market areas were exceeded through out 2010. What’s interesting is that many high
quality companies like Intel and Johnson and Johnson have not participated in this two year market cycle. A spread of the money or market breadth from the high flyers like Netflicks and Priceline into the aforementioned names would be a very positive sign for the market. Narrowing market breadth and very high bullish sentiment can be signs of a topping out process. Thus those shareholders, who were paid to wait via a dividend, may have a better year in 2011. Heading into 2011 the usual macro headline risks remain high unemployment, rising deficits, and a fading housing market; which means the market is certainly not immune to corrections. Thank you for your patronage and I will work hard to continue to earn your trust.

Although we are still a long way off from the S&P Index high of 1530 in 2007, despite a difficult economic environment, the market continues to trend higher. After four quarters of gut wrenching negative investment returns in 2008, those who panicked and sold to cash are faced with a potential second year of gains in the market. An extremely accommodative monetary policy, mergers and acquisitions among public companies, solid corporate earnings, and economic data that flat lined in contrast to previously slowing; resulted in one of the best Septembers in the history of the stock market. It seems that one of the major differences between the third and second quarter was that small portions of the macroeconomic data were revised to slightly better and current figures matched expectations. And lastly, how could we forget, the European debt bank issues were silent. As we look forward to the fourth quarter, including the month of October and the elections, the question remains as to whether the huge amounts of cash in money market funds will begin to trickle into the market. Thus far, with volume on the low side many investors who went to cash in 2008 remain under invested. Some are waiting and some may never return. Others have been sold illiquid alternative insurance products that may outperform in the short term but greatly under perform in the long term. In summation, remain watchful of jobs/GDP figures, and stay invested/diversified across all asset classes.

The beginning of the quarter found the stock market index (s) pushing up to new highs
for the year. The month of May followed with European Debt issues and poor domestic unemployment figures pushing the market into correction mode.. This correction
which we are still in has been the largest correction since the market recovery began in March of 2009. At these levels stocks are certainly not overpriced although since the recovery began about thirteen months ago the market has been trading more off of economic data then corporate earnings. Expect this tug of war between neutral
to less than expected international/domestic economic data and reasonable to positive
corporate earnings to continue to create volatility in the stock market. This quarter showed us that the chances of a V shaped recovery are clearly very slim. In order for a sustained recovery to continue both corporate earnings and economic data need to exceed expectations. This market pull back clearly shows us that the road to recovery is filled with pot holes. If consumer demand continues to get slightly better and corporate earnings exceed then eventually hiring will follow. As mentioned in last quarters report
I expected a correction. Until some of the macro data shows signs of improvement,
I do not believe that down and cheap are good enough reasons to buy stocks. However,
one revision in a data point could change this and when this happens, considering all the cash in money market accounts yielding almost zero, it is very important to be invested..

Low interest rates, and in the headlines risk continued to fall, combined with very strong corporate earnings pushed the market higher. All market corrections, which have been both short and shallow, were met with the buying of equities; although the trading volume remains on the low side. The dollar continued to strengthen and the Federal Reserve gave no indication of an interest rate hike. All this continues to indicate a green light for the stock market. Many money managers remain very skeptical of this rally which means that the momentum will probably continue to the upside. Global interdependence put short term downside pressure on the US market; although should be used as an opportunity to find value. History has taught us that a great year in the market is usually followed by an average year in terms of investment returns. Important areas to watch include: jobs, personal savings rates, consumer spending, international terror risk, housing, and credit/lending. All these areas can affect corporate earnings which in the end drive stock prices. The S&P 500 Index was at 1270 before the financial crisis officially began with the fall of Lehman Brothers. The market may well correct up to 10 percent off this recent rally, although since a catastrophe has been avoided, it would not seem out of line for the market to return to this level by year end.