Professional Documents
Culture Documents
Q3 2011
AMM
AMERICANMONEYMANAGEMENT,LLC
SECRegisteredInvestmentAdvisor
POBox675203,RanchoSantaFe,CA92067Tel8889991395Fax8663641084info@amminvest.comwww.amminvest.com
ASSESSMENTOFCURRENTRISKS
EuropeanDebtCrisis: In late June, the European Union, the European Central Bank, and the International Monetary Fund agreed to provide Greece with additional financial assistance in exchange for promises of more fiscal auster ity. The news was met with riots in the streets of Athens and rally in global stock markets. While the stock market liked the idea of a shortterm resolution, the reality is that the debt problems of PIIGS countries (Portugal, Ireland, Italy,GreeceandSpain)arelongterminnature,andthemostrecentGreekbailoutwasakintokickingthecandown the road. Due to the ongoing issues in the Euro zone, we significantly reduced our weighting in developed foreign economiesinthe2ndquarter. TheEndofQE2:TheFedsmostrecentmonetarypolicyinitiativeendedinJune.Sincetheonsetofthefinancialcrisis,the Fedhastripledthesizeofitsbalancesheettomorethan$2.8trillion.WhiletheFedwillnolongerbepumpingmoney intotheeconomyvialargescaleassetpurchases,theywillcontinuetoreinvestthematuringdebtontheirbookswhich willmaintainthesizeofthebalancesheetatitscurrentlevel.Themajorriskisthattheeconomywillnotbeabletosus taingrowthwithoutsomedegreeofartificialstimulus.TheFedseemstobetakingawaitandseeapproach,maintain ingexceptionallylowinterestratesforanextendedperiodoftimewhilereservingtherighttoembarkonadditional stimulusifconditionswarrant. TheDebtCeilingDebate:Upuntiltheearly20thcentury,thefederalgovernmentfollowedapayasyougosystem,requir ingcongressapprovaleachtimeitborrowedmoney.Congressionalmemberscomplainedabouthavingtoapproveeach billandpaymentthathadtobemadewithdebtinsteadofcash;so,adebtlimitwasapprovedin1917.Sincethen,the U.S.debtlimithasbeenraisedover100times.Currently,theU.S.treasuryestimatesthatwithoutfurtherborrowing,the governmentwillrunoutofmoneyaroundAugust2nd,2011andhasgiventhisdateasadeadlineforCongresstoraise thedebtceiling.Thisisclearlyaveryshorttermsourceofuncertaintyforthemarkets.Whilewebelievethemostlikely outcomeisapoliticalagreementthatavoidsaneartermmarketupheaval,itwill,liketheEurozoneproblems,simplybe kickingthecandowntheroad.Thereisadditionalriskthatthetwosidesdonotcometoanagreementandthedebt ceilingisnotraisedbyAugust2nd.Ifthishappens,wewouldexpectasharpnegativemarketreactionuntilanagree mentisreached(whichwewouldexpecttobequicklyforthcoming).
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EconomicData:RecentU.S.economicnewshasbeendisappointing,withsluggishGDPgrowthandcontinuedweakness in employment and housing (which are important drivers of consumer confidence, income, and spending). Despite massivefiscalandmonetarystimulus,inthesevenquarterssincetherecessionofficiallyendedinJune2009,realGDP growthhasaveragedonly2.8%.Thiscomparestoanaveragegrowthrateof5.3%forthesameperiodaftertheprior10 recessions,accordingtoDavidRosenberg,chiefeconomistandstrategistatGluskinSheff.Whileitisclearthatthishas beenasubparrecoveryrelativetohistoricalstandards,wedonotbelieveanotherrecessionisimminentandexpectthe economytocontinueitsslowgrowthcourseinthequartersahead.
WHEREWEAREINVESTINGCAPITALNOW
Alternative Assets: In the second quarter, we significantly increased our exposure to merger arbitrage strate gies.Mergerarbitrageisaspecialtystrategywherebyoneinvestsinthestockofanacquisitiontargetatalevelbe lowthepubliclyannouncedbuyoutprice.Thegoalistoholdtheinvestmentuntilthecompletionofthemergerat whichpointtheinvestormakesthespreadbetweenthepurchasepriceandbuyoutprice.Whilemergerarbitrage isnotwithoutrisks(mainlythattheannounceddealmaynotclose),thestrategyhashistoricallyexhibitedlowvola tilityandalowcorrelationwiththestockandbondmarkets.Forexample,duringthe2008financialcrisis,twoof thefundsweutilizeinthisspaceweredown.55%and2.26%respectivelywhilethebroadstockmarket(S&P500) lostover36%.Ourreturnobjectiveforthesefundsremainsinthemidtohighsingledigits.Webelieveanover weightinginthisstrategymakessenseinthecurrentenvironmentgiventhemyriadofpotentialthreatsfacingboth stocksandbonds.Inadditiontomergerarbitrage,wecontinuetomaintainourholdingsincommoditiesandreal estateaslongerterminflationhedges. Bonds:Dependingonclientobjective,wecontinuetomaintainexposuretoinflationhedgedbonds,emergingmar ketbonds,floatingratenotes,andunconstrained(goanywhere)funds.Longtermratesremaindepressedasevi denced by the move in the 10 year treasury yield from 3.75% to below 3% over the last quarter. While a good amountofourcurrentbondexposureisstructuredtowithstand(andinsomecasesprofitin)aperiodofrisingrates, mostofourbondholdingsperformedreasonablywellinthe2ndquarterasratescamedown.Theonlysignificant bondholdingchangeduringQ2wastheeliminationofourhighyieldbondexposure.Highyieldbondstendtobe moreeconomicallysensitiveandalsohaveafairlyhighcorrelationtostocks.Givenourunderlyingeconomiccon cerns,wefeltthatitwouldbeprudenttosellthemajorityofourholdings. Stocks:Wecontinuetomaintainanunderweightallocationtoequitiesinourassetallocationportfolios.Overthe last quarter, we reduced stock exposure in emerging markets, foreign developed markets (Europe), and domesti cally.Whilewearenotexplicitlybearishorofthebeliefthatweareenteringanotherfinancialcrisis,therealityis that markets have rallied significantly from their 2009 lows and, given the high degree of headline risks, it seems prudenttomaintainalowerthannormalequityweightinginthecurrentenvironment.Twoscenarioswouldlikely makeusmorepositiveonincreasingstockexposure.First,ifourassessmentoftheeconomyandcorporateprofit growth improves while stocks remain relatively flat, that could lead us to increase our stock holdings based on higherexpectedreturns.Thesecondscenarioisapullbackinstocksof510%fromcurrentlevelswithoutanyseri ous threat to the status quo (i.e. economy remains stuck in slow growth mode, jobs growth is anemic, etc). This wouldofferusamorecompellingvaluationentrypointofwhichwewouldseektotakeadvantage.
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WHATS NEW
AT
AMM
Websites:Wehavelaunchedtwonewwebsites:www.amminvest.comandwww.valueinvestingcenter.com. Amminvest.comisournewcorporatewebsite,providinginformationtocurrentandprospectiveclientsaboutourcom pany,people,investmentphilosophy,archivednewsletters,pressinformationandmore.Valueinvestingcenter.comisa financial markets blog with regular posts written by American Money Managements portfolio management team. Typical posts include information on the current economic environment, investment strategy, personal finance and more. While accessible to the public, we believe that valueinvestingcenter.com will be a valuable educational/ informationalresourceforallofourclients.
RetirementIncomeSolutions:Wehavereceivedsignificantfeedbackfromclientswhohavereachedorareapproaching retirementregardingtheirneedforasustainableincomestreamfromtheirinvestments.Withinterestratesonriskfree assets like CDs and treasury bills at historic lows, incomeoriented investors are finding it more and more difficult to fundtheirretirementyears.Dependingonincomelevel,risktoleranceandtimehorizon,wehaveseveralstrategiesto helpourclientsachieveagoodyieldinalowyieldenvironment.Ifyouareatornearretirement,orifyouaresimply seekingmoreincomefromyourportfolioinvestments,pleasecontactussowecanreviewyoursituation.
2ND QUARTER
IN
REVIEW
Year to date through June 30th, the S&P 500 gained 6.02%, International stocks (EAFE) gained 4.98%, and bonds (BarCapUSAggregateIndex)gained2.72%.Shouldyouhaveanyquestionsregardingyourinvestmentaccounts,orif therehavebeenanyrecentchangestoyourinvestmentand/orretirementobjectives,pleasedonothesitatetocontactour office.
Asalways,wethankyouforentrustingAMMtohelpyouachieveyourinvestmentandretirementobjectives.
AMERICANMONEYMANAGEMENT,LLC
Gabriel Wisdom
Managing Director
YourPortfolioManagementTeam Michael Moore Jim Rhodes, CFA Executive Director Chief Investment Officer
Robert Frazier
Financial Advisor
Glenn Busch
Portfolio Manager
Adele Canetti
Portfolio Manager
Bryan Case
Financial Advisor
Vicki Ohara
Operations Manager