Over the years, our firm has resisted general investment commentaries, preferring direct communication either in person or by telephone.  However, the recent volatility of investment values has become so extreme that we feel it is important for our clients to hear from us concerning the investment policies and strategies we are following in these troubled times, and as to our outlook for investments going forward.

We continue to believe that ownership of equity interests in U.S. companies is the best use of our clients’ capital both for the short term and the long term.  The daily negative commentary in the press and on television concerning corporate ethics, accounting abuses and financial manipulations has shaken investors’ confidence, but we believe that the reported problems are the exceptions and not the rule.  In many ways, today’s stock market crisis is not much different from the real estate and banking crisis of the late 1980s when real estate values plummeted, several banks failed and a number of corrupt individuals went to jail.  Selling real estate during that period was a difficult experience as there were few buyers and extremely low prices.  However, commercial and residential real estate acquired at that time has since become a very valuable asset.  We’re convinced that despite the current economic climate, similar opportunities are available in the U. S. stock market.

Today’s stock market is also similar in many ways to the 1973-74 stock market when the Nifty-Fifty growth stocks collapsed, resulting in a 40%-45% decline in the general stock indices.  This decline was followed by more than 150% gain in the S&P 500 over the next six years despite a rise in inflation that caused interest rates to exceed 10%.  There have been many other crises over the past 30 years including the “Drexel Burnham” scandals involving corporate takeovers and corporate debt, the invasion of Kuwait, Watergate, etc.  At the time, these larger-than-life problems seemed insurmountable, yet our free enterprise system adjusted to the conditions and the value of American companies eventually increased.  Today, we are in the midst of a financial storm and, while there are no guarantees, we firmly believe that American businesses will once again adjust and our economy and corporate profitability will move to higher levels.  

Our investment strategy is to take advantage of what the markets give us and to position capital to participate in positive economic trends.  For more than two years we have believed that the dollar is significantly overvalued relative to other currencies and that its decline would change world trade patterns, the financial markets and, in some cases, corporate profitability.  To take advantage of this expected dollar decline, we directed capital to specific economic sectors such as basic materials and to companies with significant operations overseas.  We continue to do so even though it now costs $1 to buy a Euro, up from $.85 a year ago.  The S&P 500 is down 20% this year and 8% in July.  One positive aspect of the lower stock prices is that income yields from dividends have increased, allowing for increased income returns in a portfolio.  In addition, corporate bonds have been impacted by the troubles of the equity markets and interest rates in this area look favorable today considering the risks involved.  Accordingly, we believe income returns should play a larger role in portfolios going forward.

In summary, although the current crises are being characterized as “different this time,” the markets have faced similar type problems in the past and have always prevailed.  Even though we are far from being out of the woods, we are convinced the stock market will eventually rise again to record levels.  Long-term investors who have stayed the course in the past have been rewarded, not immediately in all areas, but eventually.  We will continue to search for the right investment path that takes into account your specific circumstances, risk tolerance and asset allocations.

If you have any questions, please call Ned, Sarat, or Doug at 212-262-7670 or e-mail us at info@dclaonline.com.