Fagan Associates Columns

Over the past year Netflix (NFLX) has traded as high as $304 per share.  Today it trades around $74.  Over the past year Green Mountain Coffee Roasters (GMCR) has traded as high as $115 per share while today it is trading around $27.  Need we say more?  Investors need to establishe a disciplined approach to investing to avoid the big mistake.  For this reason, we focus this column on establishing guidelines for your investment portfolio.

Shortly after the terrorist attacks back in 2001, Francois Sicart, the Chairman and Portfolio Manager of Tocqueville Asset Management stated that it was “in times like these, unemotional, contrarian thinking and a strong sense of value can be a long-term investor’s best assets.”  Mr. Sicart further stated that “most likely, this is the greatest gut check any investor is going to see in their lifetime.  However, these are the times when the greatest opportunities also exist.”

Not surrendering to your emotional desire to sell after 9-11 paid off handsomely for stock investors.  Or, more to the point, sticking to a strict set of buying, and more importantly, selling disciplines, has paid off handsomely for stock investors.  As in life, more often than not, stock investors that set and follow guidelines, fare better than those that do not.  The following are some disciplines that may help you in managing your investment portfolio.

Buy and monitor is a much better investment strategy than buy and hold.  It was early 2007, pre- financial market meltdown, when General Electric traded hands above $40 per share but then subsequently plunged over the balance of 2007, through 2008 and early into 2009 when GE finally bottomed at approximately $5 per share.  Clearly investors would have been wise to unload shares of General Electric at some point.  The lesson learned is that no company is free from stock price risk!  This brings us to our next discipline.

The minute you buy a stock, establish a price below your purchase price at which you are going to sell.  This strategy will help you protect your principal, your most valuable asset when it comes to long-term growth of assets.  Furthermore, it will remove the emotion out of determining when to sell.  Emotion (as well as ego) is the greatest threat to your financial health and wealth because it replaces intelligent investment disciplines with hope!  When clients call asking about the stock of a particular company that they do not currently own, we often tell them that “it is more important what and when you sell, rather than what you buy.”  Predetermining a downside threshold for pain helps to protect your principal.  This makes sense to us.

If you buy a stock and it moves up, move the price at which you were going to sell up in order to assure yourself that you will not lose money on this investment.  For example, if you buy shares of ABC Company at $20.00 and place your original sell order at $17.00 (technically called a stop/loss order), move the stop/loss order up should the shares of ABC Company rise to say, $22.00 or $23.00 per share.

Buy stocks that are on the way up, this way you have a better chance of protecting your principal.  If you buy stocks on the way up, there is a good chance that you have not purchased these shares at the exact top.  Should the stock run-up a couple of points above where you purchased it, move your stop/loss order up to your purchase price, once again guaranteeing your principal for this investment.

We can’t emphasize enough the benefit of established rules when investing.  Making sound investment decisions accomplishes a couple of things, it replaces buying on greed or selling on fear, helps protect your principal and it helps you sleep at night because it removes the emotion from the decision making process.

For all of us, two of our primary concerns in life are maintaining our standard of living, both financially and in regard to lifestyle, and caring for our families.  At different stages in our lives these concerns are defined in varying manners.

Regardless of what stage you are in life, generally the following three factors must be considered prior to making a decision, financial or otherwise.  These factors must be considered because they will impact the two primary concerns noted above.  They are risk, reward and the probability of a particular outcome.

First, identify the potential consequences of an action along with the consequences of inaction.  Then, ask yourself, “what is the potential RISK of this action (or lack of action) relative to the REWARD (return) you are going to receive or what you intend to avoid.  Furthermore, by taking action what is the PROBABILITY of the intended result being realized?”

As these three factors pertain to investing and phrased in a similar manner to the question in parentheses above, but with particulars added, consider the following.

Investors must ask themselves, “What is the risk of subscribing to the belief that the stock market is not the appropriate vehicle for your long-term investment needs due to the fact that over the past decade it has gone nowhere?”  The risk is that you are wrong and that the American Economy and therefore the U.S. Stock Market will eventually recover from this malaise.  However, you will not participate in this growth as your investments will be out of the market.  Furthermore, even if you are correct in your belief, over a long period of time there is not a direct corollary between stock market returns and the performance of the economy where the specific company is domiciled.  For example, the Japanese economy has been mired in a slump for the past two decades and yet, prior to the “unintended acceleration” scare, the stock of Toyota Motor Company performed very well.

Conversely, investors should also ask, “What is the reward of over-allocating assets on a percentage basis to stocks relative to the risk that I am willing to take?”  Given the low interest rate environment in which we are and will most likely be living in over the next year or so, investors into fixed-income instruments like Certificates of Deposit and Bonds are searching for more income and growth.  Some wisely and others unwisely have begun to shoulder portfolio risk by investing into the stock market and as a consequence have reduced the predictability as well as the probability of a specific outcome.

Finally, ask yourself, “what is the cost of being wrong relative to the benefits of being right?”

If history is any guide, the recovery that the United States is currently experiencing has been modest at best.  As a rule of thumb, the deeper and longer a recession, the more robust and lengthier will be the ensuing recovery – and make no mistake about it, the last recession was deep as compared to historical standards as well as quite lengthy.  In fact, during the recovery there are usually several quarters of annualized economic growth in excess of six percent.  However, since the U.S. Economy officially exited the recession after the third quarter of 2009, over the following six quarters growth has not once exceeded six percent.  For that matter, the fastest rate of growth for that time period has been only 3.9% which occurred during Q2-2010.

In our opinion, the prime culprits for the middling economic growth can be attributed to the preceding over build-up of credit between calendar years 1993-2008; weak recoveries in the housing and labor markets and over-regulation of the financial services industry.

Despite the above, there is reason to be somewhat optimistic.  Americans have begun to work down their overhang of credit, specifically credit cards as well as other revolving loans thereby boosting their purchasing power.  In addition, the housing market and labor markets, although not robust by any stretch of the imagination, have at least stabilized.  And finally, corporations have begun to deal with the myriad of this new, onerous regulatory environment.

Regarding those issues negatively impacting the recovery noted above, three individuals, Chairman of the Federal Reserve, Ben Bernanke; Vice-chair of the Federal Reserve, Janet L. Yellen and the President and Chief Executive Office of the Federal Reserve Bank of New York, William C. Dudley, made pertinent speeches.

Describing the current status of the labor market as well her outlook for it, Vice-Chair Yellen noted that “there have been encouraging signs of improvement in recent months.  The unemployment rate had hovered around 9 percent for much of last year but moved down in the fall and averaged 8¼ percent in the first three months of this year, about 1¾ percentage points lower than its peak during the recession.  And even though the latest employment report was somewhat disappointing, private sector payrolls expanded, on average, by about 210,000 per month in the first quarter, up from gains averaging 150,000 per month during most of 2011.  Other labor market conditions have shown similar improvement.”

One day after Vice-Chair Janet Yellen made somewhat positive comments concerning the direction of the labor market, President Dudley outlined the case for a relatively buoyant consumer, stating that “the incoming data on the U.S. economy generally has been a bit more upbeat over the past few months, suggesting that the recovery may be finally establishing a somewhat firmer footing.  Real GDP expanded at a 3.0 percent annual rate in the fourth quarter of 2011, the fastest growth since the first half of 2010.  The average monthly job gain was 212,000 in the first quarter of 2012, up from 164,000 in the fourth quarter.  Sales of light-weight motor vehicles were about 14½ million at an annual rate in the first quarter, the best quarter in sour years.”

THE BOTTOM LINE – Although we may be hitting somewhat of an economic soft patch resulting in some profit-taking in the stock market.  At this time, we believe it will be limited to less than eight percent which will in hindsight have provided an attractive entry point for long-term investors.

The vast majority of economic data that has been released recently points to a domestic economy that has been improving, albeit at a modest pace.  Consider that Initial Claims for Unemployment Benefits, a barometer of the health of the Labor Market, has come in under 400,000 for seventeen consecutive weeks, a number that, according to economists, represents the demarcation line between a growing and contracting labor market.  Furthermore, Continuing Claims along with the Duration of Unemployment continues to shrink while the housing market along with housing prices although not robust, have at least stabilized.  With the above in mind, investors and consumers would be wise to consider the following.

Generally speaking, bonds and bond funds are inversely correlated to interest rates.  As interest rates move up the value of bonds go down and as interest rates move down the value of bonds go up.  Given the fact that the bond market has been in a bull market since the early 1980’s as interest rates on U.S. Treasury obligations have plummeted from nearly twenty percent to approximately three percent, in the future one would expect interest rates to stay flat, or more likely to move up from current levels.  Should this occur, the value of your bonds would decline.  .  For example, let’s assume that you invest $20,000 in a U.S. Treasury Note that matures in ten-years at the current interest rate of 2.30%.  The interest of $230 ($20,000 times 2.30% divided by two) would be paid semi-annually for a total annual payment of $460.  Let us now assume that interest rates on the ten-year U.S. Treasury Note moves up to 3.80%, not an unlikely scenario given the fact that is where it was less than five years ago.  An investor at that time would receive $380 every six months or $760 per year as compared to your $230 per month or $460 per year.  In addition to receiving less income than the latter investor, should you wish to sell the bond prior to its’ maturity date, you would receive less than what you paid.

Our recommendation would be to consider shortening up the average maturity date of your bond portfolio to less than ten-years and in conjunction with this, beginning laddering that portfolio.  Laddering consists of investing an equal amount over similar increments of time.  For example, should you have a total of $100,000 to invest, place $20,000 in five separate bonds that mature in two, four, six, eight and ten years.  Furthermore, once these bonds mature, purchase a ten-year bond, thereby keeping the “ladder” intact.

A second step to consider would be to refinance your mortgage debt now.  Interest rates on home loans are at or near fifty year lows.  There is much greater risk that they will head up substantially from here rather than continue downward.  Also, if you refinance now and rates do continue downward, just refinance again if it is to your benefit.

Inflation is not a dirty word, especially after our economy has been flirting with a deflationary environment over the past five years.  That said, with an improving economy comes a ratcheting up of demand relative to supply and therefore some upward (inflationary) pricing pressure on goods, services and hopefully wages.  We would recommend that in order to offset the erosionary impact of inflation on purchasing power, an investment into Treasury Inflation Protected Securities (TIPS).   TIPS are offered by the Treasury Department and pay a nominal yield along with an added rate of return that is measured by the Consumer Price Index.

There you go – three steps you can take now in order to either protect yourself against rising interest rates or to benefit from them.  Now get it done.

No, the title to this article is not a misprint.  This morning at 2am Americans turned their clocks forward to mark the beginning of Daylight Savings Time.  However, investors should take a look back to exactly three years ago when the picture was quite different from what it is today.

On March 9, 2009 the stock market was in the throes of a vicious bear market which from the top, set on October 9, 2007 the Dow Jones Industrial Average and the broader Standard & Poor’s 500 had declined 53.78% and 56.78%, respectively.  In fact, all the major U.S. Indices had fallen more than fifty percent.  Investors were reeling.

However, approximately one week prior to what turned out to be what is most likely a generational bottom (see buy of a lifetime), we penned an article that appeared in The Record entitled “Perform Your Own Stress Test” in which we recommended that investors conduct their own test by lopping off twenty percent of their then portfolio value and that “should you pass your own stress test, be patient and tune out the daily noise.”

Furthermore, approximately three weeks after the March ninth bottom another one of our articles appeared in The Record entitled “Try The Irrational” in which amidst all the dire projections, we noted that “at the top of a bull market there are few pessimists.  At the bottom of a bear market there few optimists.”  We observed further that “at the current time, investors are experiencing the worst ten-year stretch since the ten years ending 1938.  Sounds like investors over the next ten years might be amply rewarded for the pain they have endured over the prior ten.”

Since that March date three years ago, the major indices have soared with the Dow Jones Industrial Average nearly doubling while the Standard & Poor’s 500 has more than doubled in value.  For those that were claiming that they were “going to get back into the market once the economy looked better,” they were the losers as what they did not realize is that the stock market is a discounting mechanism and it therefore bottoms approximately six to nine months ahead of economic turns.

While it is certainly easy to predict yesterday’s weather, it is much harder to forecast tomorrow’s.  Where will stocks go from here?  We believe that for long-term investors, those with time horizons of more than twelve to eighteen months, there is still a lot of opportunity.  However, after the more recent twenty-plus percent run-up investors have had off the August 2011 lows, a pause to refresh in the form of a mid-single digit pullback would be welcome.  We would use such a pullback to add to long-term positions.

For bond investors, be careful.  We forecast a modest normalization in the economic cycle, one in which government stimulus gives way to private sector growth, that will eventually cause a rise in interest rates and bond prices to fall.  With this in mind, we generally recommend that bond investors stay away from long-dated bonds and from bond funds with average maturities of more than twelve years.  We are late in the game for bond investors.  Caution is certainly the better part of valor in this asset class.

If you’re not a sport fan and specifically a basketball fan, perhaps you are not familiar with the emergence of Jeremy Lin, who prior to coming off the bench and leading the former doormat New York Knicks to seven consecutive victories, he was spending nights sleeping on his brother’s couch in a small apartment in New York City.

Despite being the High School Player of the Year in the State of California, Jeremy Lin went unrecruited by any major schools and ended up going to and subsequently graduating from Harvard with a degree in economics and a 3.1 grade point average.  Despite being first-team all IVY League, Jeremy Lin then went undrafted in the NBA draft and had to sign on as a free agent with the Golden State Warriors in 2010 and after mostly sitting the bench ended up with the New York Knicks at the start of the 2011-2012 season where, at the beginning he sat the bench until opportunity knocked.

Having scored at least twenty points and dished out seven assists in his first six starts, Lin is in very select company that includes only fifteen players since the 1985-1986 season.  Now, the toast of the town, Lin’s nearly unbelievable story is one of rags to riches (at least for the time being) and can teach all investors some valuable lessons.

FIRST and foremost, always think critically.  Think for yourself.  Don’t believe everything you see, hear or read.  Don’t assume anything.  Jeremy Lin is the first American born NBA player of Chinese or Taiwan descent.  Perhaps this clouded the perception of the scouts who evaluated Lin.  Similarly there were those investors a few years ago, whose perceptions of companies like General Electric, Intel, IBM and Citigroup were clouded.  They thought that if they just ‘bought and held’ without consideration of almost anything, they would be alright.  That didn’t happen.  Investors must always look to upgrade their portfolios regardless of name.

SECOND, stay humble.  Arrogance leads to nothing good when it comes to investing.  Always believe that you don’t know everything about your investments.  Continue to look for information and always believe there is something negative lurking around the corner.  Try to find out what that “something” might be.

THIRD, stay hungry.  Stay on the offensive.  Don’t settle for average.  Stay on the lookout for better ideas.  Always look to upgrade your portfolio to something a bit more appropriate for your needs.  That doesn’t mean that you should be impatient or trade-happy.  It means that you should always have your antennae up for better ideas.  Don’t ignore them.

FINALLY, within reason and moderation, give your ideas a shot.  Have a strategy for selling as well as buying.  The Knicks gave Jeremy Lin a shot and then took a wait and see attitude.  As long as he was performing they kept playing him.  Stocks work the same way – as long as the holding is working let it go, all the while continuing to learn about the holding, it’s positive and negative qualities.  However, should the holding begin to go down, have a plan and execute it.

THE BOTTOM LINE – When investing, think critically, stay humble, stay hungry and have a strategy.

Ever since word spread that Facebook was filing to become a publicly traded company, we have been receiving many requests soliciting our opinion.  Given the fact that it will be three to four months prior to Facebook trading, it would be premature to weigh in with an opinion.  Many questions still remain.  However, there are some known facts that we will weigh in on.  They include.

According to the Registration Statement (Form S-1) filed with the Securities and Exchange Commission, Facebook had 845 million Monthly Active Users (MAU) as of December 31, 2011 as compared to 608 million MAU one year prior for an increase of 39%.

Facebook had 483 Daily Active Users (DAU) as of December 31, 2011 as compared to 327 million DAU one year prior for an increase of 48%.

Facebook had more than 425 million MAU who used mobile devices as of December 2011 an area of their business that is one of the fastest growing.

Facebook users generated an average of 2.7 billion Likes and Comments per day during the three months ended December 31, 2011 and uploaded more than 250 million photos per day.

Revenue at Facebook increased by 88% to $3.711 billion during calendar year 2011 from $1.974 billion one year prior and by 2,325% from $153 billion during calendar year 2007.

Expenses at Facebook increased by 98% to $2.711 billion during calendar year 2011 from $1.368 billion one year prior and by 831% from $291 billion during calendar year 2007.

The net result when comparing revenue increases at Facebook relative to increases in expenses is a profit margin of approximately 27%, slowing from prior years but nonetheless healthy by most standards.

Approximately 12% of the revenue Facebook generated during calendar year 2011 was from its’ relationship with gamemaker Zynga (ZNGA).  This revenue is from direct advertisements purchased by Zynga as well as sales of their virtual games.

Facebook shares currently trade in a private market for approximately $30 per share, which would imply a market capitalization of approximately $75 billion, more than the Walt Disney Company, General Motors and Nike.

Should Facebook come public at a market capitalization of $75 billion, it will therefore be trading at nearly 19 times revenue, this as compared to Apple and Google, which trade at approximately five times revenue.

When Facebook becomes public, co-founder Mark Zuckerberg will maintain his iron grip on the company with a 28.4% outright ownership and 57.0% of the voting rights.

Rather than bore you to death with more data, let’s just take a wait-and-see attitude regarding our opinion on whether or not the shares are worth purchased.  It has yet to be determined how many shares Facebook will ultimately issue and at what the issue price will be.  Keep in mind that if this Initial Public Offering is like the vast majority of others, nearly 90% of the shares will be taken by large institutions and insiders with the general public getting the balance.  Demand will certainly exceed supply so the first trade will most likely be WAY above the initial public offering price.

We will keep an eye on this popular Initial Public Offering as its trading debut nears.

Shortly after its regularly scheduled meeting regarding Monetary Policy the Open Market Committee of the Federal Reserve, Chaired by Ben Bernanke issued a press release that stated that “the committee decided today to keep the target range for the federal funds [the interest rate at which member banks borrow from each other from the reserves held at the Federal Reserve] at 0 to ¼ percent and currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

This was somewhat of a surprise and tacks on nearly one year from a somewhat recent press release from the Fed which put the end of this accommodative interest rate policy somewhere in mid-2013.  The released noted that “while indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated.  Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.  Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.”

Some analysts are cautious regarding the length of time that the Fed will keep interest rates low, concerned that the Fed foresees a slowing of the current pace of economic growth while others believe that this historically accommodative interest rate policy will ultimately fuel inflation.  We believe that the truth is somewhere in between as the Federal Funds rate along with market rates will remain low at least through the balance of 2012.  After that, the pace of economic activity will determine the direction of interest rates.  Why bother predicting interest rates through 2012?  The further out you travel in time, the foggier even the Fed’s crystal ball becomes.

What to do now?  For those that are borrowing, lock in historically low interest rates now.  Refinance your mortgage, refinance your credit cards and if needed, purchase a new automobile at or near zero percent.

For those that have saved, be very wary of longer-dated bonds and bond funds.  The best days for bonds are well past.  Purchase bonds that will mature in a maximum of eight years.  In fact, we might even consider trading in longer-dated maturities for these noted immediately above.  Be careful of stretching for income, even in the stock market, in the form of drastically overweighting utilities or consumer staples as dividends will become less attractive should interest rates begin to rise.  Along with some allocation to dividend payers, look for investments with secular growth stories such as Nike or Apple Computer.

Finally, be nimble.  All recommendations and plans of action are subject to change.  The Fed has given you an idea of where they “think” the economy and interest rates are headed.  However, the further one projects out there more variables are involved and therefore the more room for error.

It used to be so much easier—5 for ’05 or 8 for ’08.  Twelve for ’12 is certainly a lot of ideas.  However, the current news and upcoming events on the table, namely the problems with the Euro, the U.S. Labor and Housing Markets, the Presidential Election and the Olympics, we have plenty of resources.

1.      Occupy Wall Street will feel like renaming itself Occupy White House midway through the year.  This is not either liberal or conservative thinking.  It’s just that people are and will continue to be fed up with politics as usual.  This will keep the market on edge for the majority of the year.  Currently, we expect that by the close of 2012, the S&P 500 will reward patient investors with a total return (capital appreciation plus dividends) somewhere in the upper single digits, let’s call it 8.00% to 10.00%.

2.      Stay short.  It sounds like it should be a Randy Newman song, but we’re talking interest rates here.  We believe rates are headed somewhat higher here (FINALLY).  Thus funds like Payden GNMA (PYGNX), Double Line Total Return (DLTNX) and MetWest Total Return (MWTRX) do a good job of balancing the quest for returns with risk management.

3.      Medals and ballots.  We get treated to the Olympics and an election in2012.  Nike should be a winner but with it hovering around $100 it isn’t inexpensive.  Broadcasters and advertisers also should do well.

4.      A time and a place.  International funds have grossly underperformed their domestic counterparts.  We believe there is value in making investments internationally.  Perception is very negative and must be overcome.  This will take time.  Nevertheless, we own shares of Diageo (DEO) the spirits maker as well as companies with a majority of their revenue coming from outside the United States such as McDonalds (MCD), Intel (INTC), Mastercard (MA), Conoco Phillips (COP) and General Electric (GE) and would look to incorporate mutual funds such as Harding Loevner Emerging Markets Fund (HLEMX), the Tweedy Browne Global Value Fund (TBGVX) and the Sextant International Fund (SSIFX) as the year unfolds.

5.      Start big, end small.  (This is our Atlanta Falcons impression.)  We favor large cap over small cap but as it becomes clearer the economy is on the road to recovery, small caps could begin to outperform. Look for the Adirondack Small Cap Fund (ADKSX) as well as Baron Asset (BARAX) as the year progresses.

6.      Unleash the inner karma.  What does this mean?  As with 2011, calendar year 2012 will be a year that alternately makes you smile, makes you cry then makes you wonder.  It will be important to remain calm during market meltdowns as well as realistic during up spikes.  An Exchange Traded Fund that might help you survive these Maalox moments is the S&P Dividend ETF (SDY) whose objective is to invest in companies that have INCREASED their dividend every year for at least the past twenty-five years and currently sports a yield of nearly 3.25%.

7.      Energy shines. “Black gold, texas tea”!!  China, India and Brazil will continue to consume larger amounts of commodities, but energy will be the commodity that is the most in demand, whose price, relative to other commodities, will be most predictable. For those reasons, Conoco Phillips (COP), Exxon Mobil (XOM), Chesapeake Energy (CHK), Northern Oil & Gas (NOG), and National Oilwell Varco (NOV) fit the bill.  For those who wish exposure in the sector on a broad, more diversified basis, the SPDR Energy Exchange Traded Fund (XLE) makes sense.  Conoco Phillips sports a particularly healthy dividend (3.7%) and is more than 10% from its 52-week high.

8.      Where’s the beef? Money markets and short-duration Certificates of Deposit will become increasingly less attractive.  Over the past few years, investors have flocked to these investments, with many most likely running FROM the volatile stock market rather than TO these rather paltry yielding investments.  We believe investors will grow weary of these meager 1.00% returns during 2012 and accept more risk for potential returns.

9.      Return of the dinosaur.  Even the average Joe can facebook, use twitter and access his/her favorite blogs.  We believe that some of the major tech winners of 2012 are going to be big, established companies with hordes of balance sheet power. Consider Intel (INTC) or Microsoft (MSFT), for example, they sport dividends of 3.30% 2.80%, respectively and have billions of dollars on their balance sheets ready to be cagily invested.  Compare this to ten-year U.S. Treasury Notes at 1.92%.  Apples to Oranges, but nonetheless investments to consider.

10.   Exhaustion.  Americans (never a patient lot to begin with) will declare the end to pessimism and negativity by simply going out and spending.  We saw the first signs of this around the holidays.  Be aware this will benefit YUM Brands (YUM), McDonalds Corp (MCD), Deckers Outdoors (DECK), and Cabelas (CAB).  The desire of Americans to enjoy their lives, be optimistic and forward thinking will finally win out over the darkness that has held this country in its grips since the 2008s real estate meltdown.

11.   Real estate and the job markets will rebound.  Well, at least they won’t head further down.  We are beginning to see signs of stability in the worst hit property markets of Florida, Nevada and California as well as more consistent growth in the labor market.  Despite the underlying warts, the U.S. Unemployment Rate nonetheless is now officially 8.4%.

12.   By the end of this year, banks will eventually be good investments.  This is a sector that requires patience as well as caution.  We are just beginning to dip our toes into this pool.  However, with many U.S. banks, including J.P. Morgan Chase (JPM), PNC Bank (PNC), FNB Bank (FNB) and First Niagara (FNFG) sporting long-term track records of relatively low percentages of non-performing loans, these should begin to make their ways back into favor.

This article is the last of a four part series that pertains to year-end financial planning.  The articles have appeared on consecutive Sundays during December in “The Record” and include, in order, “Year-End Tax Planning for Shareholders of Individual Stocks and Bonds” which appeared December 11^th, “Year-End Tax Planning for Shareholders of Mutual Funds” which appeared December 18^th, “Year End Tax Planning – Charitable Giving which appeared last Sunday, December 25^th and finally, this article entitled “2011 Review – 2012 Preview.”

Calendar year 2011 was one was one which stymied the vast majority of investors, both professional and individual alike, as both found themselves whipsawed by domestic as well as international political, corporate, and geopolitical events as well as what mother nature had to throw at us in the form of the Spring Tsunami in Japan and Hurricane Irene which ravaged the Eastern Seaboard of the United States.

Indeed the past year was much like a roller coaster that at times, churned your stomach and prompted you to grab for the Maalox.  However, like a roller coaster, the year ended where it started as going into the final day of trading this past Friday, the Standard & Poor’s 500, excluding dividends, was up a grand total of 0.43%.  All in all, we consider calendar year 2011 a success!

A success you might say?  To this we respond with a resounding “yes!”  Quite simply, in addition to the two events noted above, consider what investors went through on the “Comet” ride.  Consider the Arab uprising in the Spring which began in Egypt and then swept through Saudi Arabia, Libya, Syria, Tunisia, Yemen, Bahrain, Algeria, and then leapt overseas morphing into the nonviolent Occupy Movement here in the United States.  This was just the beginning.  Investors were on the edge of their trading seats as our elected officials in their infinite wisdom and knowledge passed deadline after deadline regarding the raising of the debt ceiling back in late July and early August prompting a first ever downgrade of the “triple A” credit rating of the United States by Standard & Poor’s.

While these events were taking place, the European debt crisis simmered on the back burner through much of the Spring and early Summer only to move to the front as rioting in Greece occurred when politicians began to discuss the implementation of budgetary austerity measures.  This discussion pushed the yields on Greek sovereign debt to nearly 60% which, like a contagion, spilled over into other European countries sitting on the Mediterranean Sea, notably Italy and Spain.  It was only through measures taken by global Central Bankers that at least temporarily stemmed this contagion by adding liquidity into the financial system.  Although this will buy Europe time, it does not solve the issue of solvency.  One reason why we consider this year from an investment perspective a success is because when you look around you, unchanged isn’t bad.  The French Stock Market fell approximately 17% last year while the German, British and Swiss bourses slipped approximately 15%, 8% and 6%, respectively.

There’s a country song by Rodney Atkins which states “if you’re going through hell, keep on going.  Don’t slow down.  If you’re scared don’t show it.”  That is exactly what the United States did during 2011 because although the housing and labor markets have remained in the doldrums since the recession began in 2008, we are exiting calendar year2011 in better shape than we entered it as housing inventories are being worked off and jobs have begun to be created.  All in all the economy has weathered many body blows, but remains on the upswing.  That is a plus.

For the reasons noted above, we are happy investment returns have been flat for 2011.  However, the real question is what will calendar year 2012 bring.  In a nutshell, we currently believe calendar year 2012 will bring more of the same as 2011 in terms of volatility and “Maalox Moments,” but with a bias to the upside.  Furthermore, we believe if we are wrong it will be because this outlook will have been too conservative.  There is a real potential for a recovery in the manufacturing sector as more companies are returning jobs to our shores, a recovery in the housing market for reasons noted above and an energy boom.  However, the wild card remains our elected officials.  Will they take the necessary steps to rein in spending on entitlement programs such as Medicare, Medicaid and Social Security without compromising this slow, but mounting recovery or will they continue to take the easy way out, passing the buck until after next year’s Presidential Election?  A balancing act between temporary stimulus and long-term spending discipline is paramount if we are to right the U.S. Economic Ship.  If this occurs, we believe the stock market is in for more than double digit gains in 2012.  That said, we put this likelihood at less than 50% resulting in our more cautious outlook outlined earlier in this paragraph.

Best wishes for a Happy, Healthy, and Prosperous New Year!