Investment Outlook
After a very strong Q1 for financial markets, second quarter returns were more subdued. It was a quarter marked by more cross currents than any other in recent memory. The generally favorable news on corporate performance that was delivered in the form of strong First Quarter financial results was offset by headline data about slowing economic growth in the U.S. and fears about the impact that a Greek default would have on the global financial system.
More than the economic data, what troubled markets in my opinion was the relentless stream of headlines relating to government and central bank intervention in global economies.
Eurozone President Jean Claude Juncker (also President of Luxembourg) may have delivered the single statement that best captured the essence of what investors faced during the past quarter and that remains a challenge today. The Wall Street Journal reported that in April Juncker had said in addressing a gathering on the topic of financial crises “When it becomes serious, you have to lie.” This statement attracted not very much attention until early May when Juncker proved to be a man of his word. His office issued first a denial, and then a confirmation that a meeting of key European finance ministers had occurred to discuss the Greek situation on May 6th. Certainly misinformation has been passed along in many instances over the years, but for someone of Juncker’s stature to so boldly admit it seems particularly in keeping with the times.
David Viniar, Goldman Sachs Chief Financial Officer captured well the sentiment of many market participants in his comments on the firm’s 2nd quarter earnings conference call. He said “a lot of what is happening in the markets, at least it felt that way to us, were [sic] not driven by the underlying economic issues but by political issues. Markets were moving based on statements. That’s very hard for us to analyze and we found it hard to take advantage of.
The good news is that corporate performance remains strong. According to Standard & Poor’s, of S&P 500 index companies reporting their 2nd quarters so far, 74% have surpassed expectations. Further, after declining to 14.1% growth from 16.6% in the 1st quarter, year on year earnings growth is expected to reaccelerate in the second half to 16.4% in the 3rd quarter and 19.8% growth in the 4th. In another healthy sign, capital expenditures by companies in the S&P 500 grew 46% in the first quarter versus the first quarter of 2010.
A few changes to client portfolios that were made in a broad fashion during the second quarter were as follows:
1. The sale of the closed end funds John Hancock Bank & Thrift Opportunity Fund (BTO) and the Hambrecht & Quist Healthcare Investors (HQH). Both had seen their discounts to Net Asset Value decline (a good thing) since they were initially included in client portfolios over a year ago.
2. Purchase of Teva Pharmaceuticals (TEVA). This Israeli based company is the world’s largest producer of generic drugs. Its management has a long track record of successfully consolidating acquisitions, and they are in the midst of two significant such consolidations right now. These will offer them plenty of opportunities to grow earnings through cost cutting. Also, the generic drug industry is poised for significant growth over the next several years as certain major drugs lose their patent protection and government involvement in health care spending increases.
3. Purchase of Royal Bank of Canada (RY). This Canadian bank is extremely well capitalized and its loan book is solid. They never cut their dividend during the financial crisis and they recently raised it for the first time in several years. The current dividend yield is a well covered 4.06%.
4. Purchase of Anglo American (AAUKY). In addition to iron ore and copper mining, this South African mining company owns 45% of diamond producer DeBeers, and accounts for 40% of global platinum production. Diamond prices have recovered well since the recession and platinum possesses attractive leverage to automotive demand. Auto sales are expected to continue to grow thanks to the rising middle class in emerging markets and ongoing economic recovery in the U.S. The business generates enormous free cash flow, and thanks to that the company will most likely be debt free and positioned to expand its dividend payments and share repurchase by year end.
Thank you for your continued support. Our business grows by referrals and has expanded from $5 million in assets under management in 2007 to almost $29 million as of today for an annual growth rate of over 50%. We continue to believe that globally diversified balanced portfolios are appropriate for most individuals. We carefully research the securities in our clients’ accounts, and the clients enjoy the benefits of liquidity and transparency of their holdings.
Sincerely,
Taylor Thomas
Principal
As of 9/8/2011 South Shore Capital Advisors clients and its employees are holders of all of the above mentioned stocks. This content is provided for information purposes only and is not intended as research. Investing involves the risk of loss. South Shore Capital Advisors is a boutique registered investment advisory firm with offices in Cohasset MA, and Newport, R.I. For more information about South Shore Capital Advisors go to the link "About South Shore Capital Advisors" at the top of this page.
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