Market Update

“Listening and reading recent reports of mainstream media outlets could make one wonder if a new meltdown of the financial system is at hand. Headlines about double-dip recession, plummeting housing starts and consumer sentiment dominate the news. To be sure, latest batch of overall economic reports has not been stellar. Yesterday, markets dived after Fed Chairman Ben Bernanke said that the outlook for the economy was “unusually uncertain”. Really? Has it ever been unusually certain?

Right now, the earnings season is in full swing and company reports so far contradict doom and gloom. After many bellwether companies, such as Intel, Apple, Alcoa, Morgan Stanley, Caterpillar and others not only beat estimates, but offered higher guidance going forward, investors are finally beginning to take notice. Ultimately, it is only the earnings that drive the stock prices.”

The two paragraphs above are in quotes because they are taken verbatim from my shareholder letter at end of second quarter of 2010, exactly one year ago. The only difference is that Ben Bernanke this time around complained, “We don’t have a precise read on why this slower pace of growth is persisting”. Remarkably, worries about the state of economy and the markets are essentially unchanged — stagnant housing market, stubbornly high unemployment, and even debt crisis in Greece — were on investors’ mind one year ago as they are today. The markets took a similar path to last year as well; however, the decline this time around was not as severe as in 2010: then, peak-to-trough, S&P 500 dropped 16%, compared to only 8% this year (that is, of course, assuming that we have already found a bottom in this correction).

All that pessimism seemed to evaporate during the last week of the quarter, when it became clear that Greece will avoid default, at least for now, and after a surprisingly good report on manufacturing data was issued. As a result, the markets were able to recover and ended the quarter with minor losses.

It is said that bull markets climb the wall of worry. And we certainly have a long laundry list of worries, which hasn’t changed that much for a year. What did change, however, was the value of your portfolio, which increased by well over 30% in the last 12 months. So let us, as investors, not pay too much attention to media worry du jour, and instead concentrate on the companies that we actually invest in.