Client Update – Q3 2011

Oct 6, 2011

To All,

The markets have been rough. The S&P 500 was down (-7.18%) in September and is down (-10.04%) for the year. In my last blog, I surmised that we were entering the next phase of the bear market. On the first day of trading this month, the S&P 500 index closed below 1100, down -19.37% from the 2011 high set in late April. This selloff is just shy of the -20% that “officially” defines a bear market. When the market breaches that milestone, the financial media will reluctantly call a spade a spade and admit that this is not a mere correction.

Maybe the financial media will also concede that the economy is already in another recession following the most shallow economic recovery in U.S. History by most relevant measures (i.e. unemployment, GDP, etc).  I can think of one measure that is inconsistent with that reality… Corporate Profits.

Profits of the 500 largest American corporations (S&P 500) swung from negative aggregate earnings in early 2009 to record earnings in 2011. Of course, this growth in net income cannot be attributed to revenue growth. In fact, corporate revenues have remained generally stagnant over that same period. Instead, companies improved their margins by cutting variable costs and increasing productivity. That is code for, “companies laid-off millions of employees and those who still have jobs are working harder.”

The problem is that companies will only achieve a fleeting boost in corporate margins through layoffs. If you think about it, the employees they laid off are consumers who, without jobs, can no longer afford to buy their products. Already, topline revenues appear to be rolling over and margins are beginning to get squeezed. When that happens, stock prices fall.

What’s the market’s downside risk from here? I don’t have the answer, but I do have a statistic. During the average recession, the stock market declines about 40%.  Investors beware.

Catamount portfolio investments have performed well in the face of recent market declines. Alternative Investments and a substantial allocation ot cash certainly helped. See the following Catamount portfolio data.

While a near-term rally is expected, we are currently positioned for more downside. It’s been said that, “Offense wins games, but defense wins championships.”  Fittingly, capital preservation is our overriding principle right now, but we will get more aggressive and optimistic at lower asset prices.

Please let me know if you have any questions.

Best Regards,


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