“Be fearful when others are greedy, and greedy only when others are fearful”
Warren Buffet, Billionaire Investor
Enclosed please find your first quarter reports. This quarter proved to be a very difficult one especially in the investment universe of US domestic stock indexes. As a result, we have increased exposure to alternative market sectors to add diversification, as well as potentially enhance returns. We have chosen to add a commodities position which is new for the portfolios as well as increase European equities.
As you may recall from last year, it was not until the fourth quarter that strong portfolio returns occurred which allowed us to outperform the S&P 500 index by almost 100%. Investors forget that over shorter periods there often is a disconnect between stock prices and economic data. Corporate profits have increased significantly since the recession ended in 2001, yet equity returns have not matched those increases. We believe there is more upside ahead.
The next Federal Reserve meeting is May 3rd. One concern they face is rising inflation. U.S. consumer prices rose 0.4% more than forecasted. Prices on that basis were up 2.4% annualized from the previous year, the largest increase since August 2002. This increase may lead to a half point increase (0.50%) in interest rates at the Fed’s next meeting. The rate has been raised a quarter percent seven times by the Central Bank since June 2004. The good news is higher inflation hasn’t thwarted real economic growth.
Portfolio Updates
All major indexes for equities and fixed income investments were negative for the first quarter.
See chart below:
|
INDEX
|
YTD % CHG
|
|
Dow Jones
|
-2.59
|
|
NASDAQ Comp.
|
-8.10
|
|
S&P500
|
-2.59
|
|
Russell 2000
|
-5.60
|
|
MSCI EAFE European
|
-0.77
|
Our managed accounts out-performed their benchmarks in most cases. However, on a short-term basis a tracking error is possible. The enhancements to the portfolios we made during the quarter are detailed as follows:
- We sold a portion of high yields bonds and the proceeds were used to purchase a combination of Foreign Bonds and TIPS – Inflation Index Treasuries.
- We sold a position in small cap growth, a sector with tremendous returns over the past two years, and the proceeds were used to purchase our Real Return Commodities position. The Commodities should do well in a rising inflation environment.
- We also sold the balance of our REIT positions where most clients had over 30% gains. The proceeds were used to purchase European/Global Value Stocks.
- We feel the international sector offers better opportunities than US domestic equities at current P/E levels. We also spent a lot of time considering the benefits of adding a commodities asset class. We feel that the investor will be paid a risk-premium return, and that commodity futures will continue to generate positive returns. We may, in fact, increase this allocation further.
Singer Xenos Update
We are in the midst of a national employment search to upgrade and add to our support staff and enhance our research efforts. So look forward to some new staff members to serve you in the future. We are taking our time to search for the right candidates.
Marc Singer was recently featured in the Miami Herald on Sunday, March 27, 2005 regarding the new Federal Bankruptcy Laws. You can view the article on our website, if its of interest to you.
We anticipate the second quarter being more productive for the managed portfolios. Keep in mind, during the past twelve months the average expansion of sales by S&P 500 companies was more than 9%. This translates to overall increased profit margins and a nearly 12% year-over-year profit gain from operations for these companies.
We see good things on many different horizons and look forward to a productive year. As always, we value our clients and are here to answer any issues you may have.
/Singer Xenos Wealth Management
