Sheffield Investment Management, Inc. Click here to login to your account. Click here to login to your account.
Welcome
  

First Quarter, 2010

 

For this first quarter letter we are modifying our information format to prioritize and streamline the information you receive from us.  The following bullet point list presents our current thoughts regarding the most important issues which influence your asset mix and the specific securities held in your portfolio.

Text Box: • Money markets and corporate credit markets have almost completely returned to pre-crisis levels of liquidity and investor confidence. The Fed has done a good job of restoring investor confidence in the credit markets. • Inflation expectations remain low at home and abroad for at least the balance of 2010 and perhaps well into 2011. • There has been no fall off in demand for U.S. dollars this year, as foreign purchases remain strong. The Euro however is absorbing a hard body blow from Greece and from possible contagion risk. • The combination of a strong dollar and strong stock market action indicate continuing confidence in the global recovery through 2010. • The severity of manufacturers’ production cutbacks during the recession has led to supply-chain bottlenecks and shortages in a number of domestic and foreign industries. This should lead to surprisingly high profits during the remainder of 2010 for many companies and an expectation of rising employment to follow. • Domestic and international stock markets are reasonably priced today. Markets are priced above bargain levels and well below future bubble market valuations. • Virtually all of our indicators are telling us that rising U.S. deficit spending is currently not a problem. The deficit issue for the U.S. is a medium-term 3-5 year in the future type of problem. Armageddon, in the form of a domestic financial meltdown, continues to be postponed. • Banks have recently started to ease lending standards for larger corporations and commercial real estate ventures, a plus for further expansion of the economic recovery. • The early part of the current bull market for stocks was fueled by government efforts to provide liquidity to the financial markets. A sustained recovery however was always dependent upon an uptick in consumer spending. This second and more fundamental phase of the recovery is now materializing. • The debt situation in Greece remains shaky and our big fear is for possible contagion around the European region. Euro area economic problems are rapidly reaching a level which represents a serious threat to the strengthening global economy. The deficit issues of Greece, Portugal, Ireland, Italy and Spain have shaken the world’s faith in the Euro.

                                        

              3 months ending March 31, 2010        

Money Market Fund Proxy                                   0.0%                                                 

Russell 3000 Index (US stocks)                             5.9%       

MSCI EAFE Index (foreign stocks)                      0.9%       

MSCI Emerging Market Index                              2.4%       

Lehman Aggregate Bond Market                          1.6%          

MSCI REIT Index                                              10.0%  

Gold (Commodity)                                                1.5%  

Philadelphia Gold/Silver Mining Cos.                    -1.6%

CRB Commodity Index                                       -3.5%  

CPI Inflation (12 months)                                     2.3%

 

Cash Returns

 

Money market funds, treasury bills, short term certificates of deposit (CD’s) and commercial paper continue to offer yields that are close to zero percent.  The Federal Reserve has repeatedly stated that it will continue to hold short term interest rates at close to zero until the economic recovery demonstrates unambiguous signs that employment is in a clear uptrend and consumer spending is showing meaningful rates of growth.  Futures markets are projecting that there will be no increase in short term interest rates until the fourth quarter of 2010, or perhaps sometime thereafter in 2011.

 

Our present investment strategy with respect to cash in your account remains to hold only an amount of cash sufficient to pay periodic distributions and account management fees.

 

Equity Returns

 

The typical outperformance by non-U.S. stock markets relative to domestic stock markets came to an end during this year’s first quarter possibly due to concerns over global contagion from Greece’s escalating financial crises.  Furthermore, the surprisingly strong financial performance of domestic consumer-related companies has raised the prospect of an unexpectedly strong domestic recovery as the year progresses.

 

We continue to maintain the equity portion of your portfolio at approximately 50% domestic and 50% international companies.  Furthermore our domestic stocks typically have a significant global component to their sales and earnings, so at times when enthusiasm for the global recovery story temporarily loses its appeal, U.S. equity markets may enjoy a relative outperformance vis-à-vis foreign markets, as has been the case during the first quarter.

 

As we explain in detail in the accompanying special report, we are becoming increasingly alarmed about Greece’s downward financial spiral, unfolding at a time when developed nation economies in general, and their banks in particular, have not yet fully recovered from the 2007-08 recession.  The seeds of financial crises typically take root among those entities that are employing the greatest leverage, and now that dubious distinction belongs to the governments of many of the world’s developed countries.

 

Fixed Income Returns

 

For yet another quarter, the Federal government’s prodigious need for capital failed to result in any meaningful rise in interest rates.  In fact the opposite occurred: interest rates all along the yield curve held steady or actually declined by a few basis points during the first quarter (a basis point is equal to 1/100 of a percent).  Corporate debt yields continued to decline (causing bond prices to rise) as the economic recovery improved the financial health of companies across America.  The interest premiums over Treasury yields demanded by investors for risk associated with owning corporate bonds is expected to decline further as the year progresses, assuming investor confidence is not tested by some extraneous shock to the system such as a default by Greece on its debt.  This means that corporate bond investments will probably continue to generate strong total returns over the balance of 2010.  Currently, yields on long term investment grade corporate bonds exceed 4% and current yields on higher risk, below-investment-grade bonds exceed 8%.

 

Your account owns a combination of higher quality and lower quality corporate bonds and/or bond funds.  These investments have been a significant factor in the outperformance of your fixed income return, relative to the return of the aggregate bond market index for the first quarter.

 

To complete this picture, your portfolio also owns some foreign-based fixed income securities.  What attracted us to these securities was a) higher interest rates than those available from investment grade bonds at home b) the potential for currency appreciation from local currencies or c) a combination of the above. 

 

The poorest performing segment of the bond market was U.S. treasury securities.  We continue to not own any treasury securities in your portfolio at the present time.

Other Assets Returns

 

In the “other asset” category, gold and precious metals mining companies took a breather during the first quarter which was prior to the date when the crisis in Greece became news.  REITS on the other hand, experienced a continuation of their strong stock market behavior which began in 2009.  The domestic economic environment remains favorable for further gains in the REIT sector as investors continue to position themselves for an eventual real estate recovery.

 

Inflation

 

Fear of rising inflation is strong not only among our clients, but also among most investors and the financial media in general.  This concern is in sharp contrast to the actual behavior of financial markets where inflation has been in decline for many years including up to the present moment.  What is surprising to most people is how inflation can remain so benign around the world in the face of such massive government injections of liquidity into many countries’ banking systems.  The answer to this riddle, according to BCA Research, is that extra money injected into the financial system is only inflationary if it fuels rapid credit growth causing consumer demand for goods and services to increase relative to supply.  This is clearly not the situation today given banks’ ongoing reluctance to lend and consumer reluctance to borrow.  Inflation may become a problem again someday, but not any time soon.

 

As always, we encourage you to call us regarding the contents of this quarterly report package or any other issues which are relevant to your portfolio.
 
 

Home | Firm Overview | Investment Process | Services | FAQ | Your Account | Web Links | Quarterly Reports | Contact
Getting To Know You | Deciding Asset Allocation | Selecting Equity and Fixed Income Assets | Monitoring Your Portfolio
Client Communications | Privacy Statement | Disclaimer | Site Map

900 Circle 75 Parkway | Suite 750 | Atlanta | GA 30339 | Phone: (770) 953-1597 | Fax: (770) 953-3586 | Email: info@shefinvestment.com

Designed and Developed By: Elegant Image Studios, Inc.