We think that U.S. Equities will remain choppy at least through Q2 and Q3, but do not see more than a few percentage points of additional downside at this point.  After a couple days of selling, perhaps global investors will put some money to work in the United States as it appears to be the best house in an otherwise so-so neighborhood.  Stay on your toes.  Keep some powder dry.

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.

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?”

Guest after guest appear on CNBC and rarely do hosts qualify their knowledge level. They are left to make recommendations in a vacuum. “ I like this, sell that, “schnitzel” that company” are frequently part of the conversation. If they are friends of the show, perhaps they will get a pat on the back for some former CALL. Business shows dole out compliments (but never criticism) like Oprah hosting Tom Cruise.
Apple (before today) had been under attack. The stock declined some 90 points quicker than you can pull up an ap on their new IPhone (assuming that you have Verizon service anyway). Analysts lined up to pontiificate on the demise of Apple and they were WRONG.
It’s easy to be wrong in this business -there’s nothing criminal about it - it happens to us.  What is wrong is to create for readers, listeners and vieweres the facade that you are never wrong. Viewers assume guests’ recommendations are infallible until they choose to implement one of those “calls”.
A reminder - do your own research and evaluate your own situation - tax, investement objectives and goals before using anyones’  stock or bond ideas (and that includes Fagan Assocaites)

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.

However, it is arrogant to believe you KNOW what is going to happen.  Things may change.  There is a good chance that Presidential Politics may get very ugly over the next few months and should stocks pay too much heed to the rhetoric, we could be in for a very choppy market.

Therefore, the “weather” market forecast for now is clouds giving way to sun over the next few days (meaning this correction should bottom over the next week or two and no more than a few more percentage point drop) at best and at worst some additional lasting choppiness.  We would be inclined to use this pullback to add to long-term secular growth stories.

Regarding fixed income, keep your average maturities less than ten years and look for opportunities in corporates, government agencies and high yielding corporates.  It is late in the game in the bond bull market and thus, caution is the better part of valor.

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.

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.