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"The mental flexibility the Senate demonstrated in creating these zigzags is breathtaking." Warren Buffett, on the phase-ins and sunset provisions of the 2003 tax law. Late June 2003 finds a lot of rain, the Bypass getting busier by the day and summer starting to arrive. All eyes in the market world are on Alan Greenspan and threats of deflation. Bonds are at 50 year highs and the equity market has been rallying, too. But what everyone wants to know is "where do we go from here?" See Reader Mail, below, for more commentary. In this issue of Investor's Corner:
1. Reader mail: (Note: this letter was received prior to the interest rate decision of 6/25/03-asides reflect post-announcement knowledge) Dear Will, what do you think about interest rates? My mortgage banker says that if the Fed cuts rates 25 BP at its June meeting then interest rates will go up in response. I think that rates will go down in response. Your thoughts appreciated. Signed, Janet Dear Janet, Thanks for your note. There are a million variables with the interest rate issue-I think that what the Fed says will be more important than their action. (Note: the Fed lowered the Fed funds rate 25 basis points to 1.0% at the June 25 FOMC meeting, the lowest level since 1958-and the bond market sold off ie: lower prices, higher rates in reponse. My interpretation of the reason for the sell-off was that the 25bp cut indicated an underlying stronger economy than the "bond ghouls" wanted to see, and thus less of a need for the "flight to quality" of bonds.) I tend to agree with you that (on paper at least) any further drop in rates should be accompanied by a rally in the bond market (ie higher bond prices lower bond yields) Mortgages are pegged to the 10 year note, which closed June 25 at 3.36%. And, especially, if there is more talk or evidence of deflation, bond yields will continue to drop. (Note: the Fed's statement indicated that "The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal"-a reasonably strong position, given all the discussion regarding deflation that has taken place over the last 18 months.) I am glad that there was not a 50bp cut on 6/25/03-that would send some bad signals to the market and would cause money market "real" yields to drop below 0%. (Bonds would rally like crazy in a "weak" or deflationary scenario-not good for markets, economy, anything except cash and maybe gold) I think that no action or 25bp cut with "strong" economic wording would cause the bond market to sell off (ie lower prices higher yields-what we are in fact seeing). If this question is in the context of refinancing your mortgage, I would not split hairs, I would go ahead and lock in at current rates-just my $.02. Bonds just can't go that much lower! Chartists would say that such a significant bottom (ie 50 year low for the 10 year note at 3.1%) must be at least nominally retested to be shown as "valid" -However, the bond market is also news and event-driven, and the wording of the Fed's statement may preclude the need to retest 3.1% on the ten year note. Thanks for writing! 5 day chart of 10 yr note-currently yielding 3.45%
Send your questions to will@darecapital.com and I will do my best to answer them in upcoming newsletters. 2. Model Portfolio Updates: The 2003 tax cut has made owning individual stocks more advantageous to the average investor. DCM tracks three individual stock portfolios and one bond fund portfolio. These portfolios are built to track how different investment themes are being received in the market. They share the philosophy that a thoughtfully constructed, low turnover equity or fixed-income portfolio can allow individual investors to achieve competitive returns with below-average expenses. The 21st Century Growth Portfolio had a total return of 12.43% for its reporting period 8/28/02-6/25/03, versus 7.76% for the S&P 500. This concentrated stock portfolio invests in common stocks of companies that are perceived to have above-average growth potential in coming years, with growth potential weighted more heavily than strict fundamental valuation metrics. The portfolio's top three gainers for the reporting period are are online broker and DCM custodian Ameritrade (AMTD), up 86% since purchase, controversial conglomerate Tyco (TYC), up 32.2%, and media dealmaker John Malone's Liberty Media (L), up 30.7%. There were no buys or sells in the portfolio for the period. The Challenge Portfolio has had a total return including reinvested dividends of 9.79% for its reporting period 1/15/03-6/25/03, versus a total return for the S&P 500 over the period of 7.02%. This concentrated stock portfolio came about in response to a challenge from a fellow investment advisor, who wondered out loud if I could build an equity portfolio that could outperform the S&P 500 on a performance and expense-adjusted basis over a one year period. The portfolio's top three gainers are cement factory operator Florida Rock (FRK), up 25.15%, retailer Target Stores (TGT), up 23.55%, and computer retailer Dell Computer (DELL), up 19.86%. The have been no buys or sells in the portfolio for the period. The Dividend Value Portfolio has had a total return of 4.26% for the reporting period, versus 7.76% for the S&P 500. Dividend Value attempts to identify and invest in the stock of solid, established companies with reasonable fundamental valuations and above average dividend payouts. Valuation is a primary concern in this concentrated stock portfolio-(simply put, we like to buy 'em cheap!) whose performance has been hampered by issues with holdings Schering-Plough (SGP) and Duke Energy (DUK). Top gainers in the fund include banking giant Citigroup Finally, the Fixed Income Portfolio, a simple, diversified bond fund portfolio, had a total return of 6.57% for its reporting period 8/28/02-6/25/03. 3. Short takes on the 2003 Tax Cut:
4. Charts Three year S&P 500
One year S&P 500
Well, that's enough for this time. Feel free to call or write with questions or comments, or to inquire about my firm's services as they relate to your individual situation. Everyone please have a safe and happy summer! Good investing, Will Woodard is president of Dare Capital Management & Advisory, a Registered Investment Advisor and fee-only financial planning firm based in Kill Devil Hills. Dare Capital is committed to providing independent, objective, and professional financial advice. Mr. Woodard, his firm, or his clients may own the investments mentioned herein. Contact Will at (252) 480-0156 or e-mail Will@darecapital.com The fine print: This newsletter can be reprinted or forwarded--however, it is requested that reprints of any material in this newsletter include credit to Dare Capital Management and Advisory (252)480-0156 and an email link to will@darecapital.com. Thanks for spreading the word! All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Mr. Woodard, his firm, or his clients may own the investments discussed in this newsletter. Past performance is no guarantee of future returns. The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons. Copyright 2003 Dare Capital Management and Advisory-all rights reserved. |
