Y H & C Monthly Newsletter- March 2010 Edition #22

Index	January 2010 Return
Dow Jones	-3.45%
S&P 500	-3.70%
Nasdaq	-5.37%
Russell 2000	-3.73%
Y H & C Newsletter Annualized Return	+37.07
Y H& C Newsletter Monthly Picks
January 2010 Picks	-4.67%
December 2009 Picks	-.28%
November 2009 Picks	-1.43%
October 2009 Picks	+13.56%
September 2009 Picks	+2.28%
August 2009 Picks	+16.97%
July 2009 Picks	+28.27%
June 2009 Picks	+29.68%
May 2009 Picks	+35.74%
April 2009 Picks	+61.02%
March 2009 Picks	+122.37%
February 2009 Picks	+83.74%
January 2009 Picks	+52.87%
2008 Results Available Upon Request

US Economic & Financial Markets Outlook: Is the Economy Improving?  Will the Unemployment Rate Go Down?  Is the Huge Government Stimulus Finally Kicking In?  The Name of the Game is Demand!!!

        In the month of February 2010, the Dow Jones Industrial Average gained 2.56%, the S&P 500 increased 2.85%, the NASDAQ rose 4.23%, and the Russell 2000 tacked on 4.4%.  As 2010 grinds on, the political reality of the current economic environment is slowly putting current incumbents in a very uncomfortable situation.  With unemployment staying stubbornly high at around 10%, elected officials have to be very nervous about their prospects for reelection (or as my brother so eloquently put it, to be able to ride the pretty elevators) come November of 2010.  The unprecedented stimulus the Obama administration applied to the U.S. economy in 2009 has not, as of right now, a meaningful increase in jobs.  Many economic and political analysts continue to harp on the unemployment rate as proof the current administration’s policies are not working.  Defenders point out the mess Mr. Obama inherited, the huge run of the stock market (>50% from the March 2009 bottom), the loosening of credit markets for corporations, and the last two quarters of GDP growth as proof that the economy is starting to improve.  So where does the reality lie?  Lou Holtz, the ex-famous football coach at Notre Dame, has a famous quote:

           ‘Nothing is as bad as it seems, nor as good as it may seem.  Somewhere in the middle, reality doth lie.’

           From my perspective, Mr. Holtz could very easily have been speaking about the current situation of the U.S. economy and financial markets.  I believe the overriding issue for the economy, and the vast number of segments that compose the economy, is the demand for products and services.  Demand is going to be a function of the specific industry of the worker or company.  In many industries, demand is going to be relatively light.  For example, generally there is significant overcapacity in the retail sector.  There are too many department stores, regional malls, outlet malls, strip malls, and local shopping centers with plenty of vacancies (near 20%).   In almost every area of retail there is brutal competition as there are all kinds of companies selling very similar kinds of products.  As always, the good and great companies stand out through their operations and marketing, but whatever demand that does exist has huge competition for it.  In this kind of situation, the specific industry is going to struggle for the foreseeable future.  In time, the overcapacity will work itself out, and the superior competitors eventually gain market share.  However, the reality is retail will be a long slog for most companies.

            On the other end of the demand spectrum is would be an industry like health care, which also includes drug manufacturers.  In general, there is overwhelming demand for products and services that help sick people get better, or healthy people stay healthy.  Making up anywhere from 15%-18% of the U.S. economy, health care related industries continue to see opportunities to expand via any number of strategies.

    The bottom line for jobs is if the demand is evident, no employer will turn down an opportunity to expand knowing more profits are around the corner.  The key question for each industry is what are the demand conditions for competitors?  With so many segments of the economy facing overcapacity issues- industries like housing, gaming, retail, commercial real estate, car manufacturers, many commodity producers, it remains difficult to see how U.S. GDP growth can accelerate to over 3%.  A huge push in the clean energy area by venture capitalists and many large companies like GE, BP, Siemens, Cisco, etc, (along with a large emphasis by the current administration) may see quicker progress than many think.  One thing is certain, come November of this year, the unemployment rate may speaks volumes as a tell tale sign as to what will happen in the always crucial mid term elections.

         Global Economic & Financial Markets Outlook: The First Few Months of 2010 See Slight Declines, Positive Results Are Hard To Find With Global Markets

            The first few months of 2010 have seen international markets remain sluggish as most country indexes are off anywhere from 5-10%.  Clearly, the sovereign debt issues in Greece, Portugal, Spain, and Ireland remain a large concern for investors, and many see the Euro currency as a continuing source of weakness for the rest of 2010.  Many professional investors are betting heavily against the continued decline of the Euro, especially against the dollar, Pound, Canadian dollar, and other major world currencies. 

            In looking across the international spectrum, negative results are consistent all over the world.  In China, the Dow Jones China Index is down 10.4% for the year, and in Hong Kong, the Hang Seng Index is down 5.8% for 2010.  The Bombay Index in India is down 5.9% for the year, and in Taiwan, the Weighted Index is down 9.2% for the first two months of the year.  Turning to the Euro zone, the index in Europe is down 10.9%, and Spain, Portugal, Greece, and Italy have declined 18.1%, 15.4%, 19.4%, and 13.6% respectively.  As always with investing, looking for situations where the price may be cheap but the quality of the merchandise is good, I certainly believe any situation where there have been large price declines is worth investing, but one must be very cautious with any country in Europe.  Lots of research would be required in any country in Europe one might be looking to invest in.

            Needless to say, positive returns anywhere in the world are hard to find.  Countries in the black include Japan +3.2%, Denmark +.6%, and Malaysia .4%.  The most unusual country to show a positive return, and quite a good one at that, would be Sri Lanka +12.5%.  One must admit, you would have to be an enterprising, hard working and very thorough investor to find a Sri Lanka at the start of 2010.  Still, it shows you that positive returns are always somewhere to be found, especially with the large, interconnected world we live in.  

Y H & C Investments: The Psychology of Investing: 2010 Starts Off With The Blah’s, and A Few Words from Mr. Buffett Puts Investing in Perspective  

            The first few months of 2010 for the U.S. stock market could accurately be described as “BLAH”.  It only seems natural for the market to take a few months to refresh, and the sideways trading seems to verify the market needs some time to digest 2009 gains.  A key question to consider is what kind of investor are you- a trader, an investor, or possibly a combination of both.  The key characteristic of most traders are that they are always looking to take profits, or at the very least, they want to make sure they are hedged.  Market makers are a great example of traders as they provide liquidity when stock prices drop (meaning they are buyers), and they look to sell when prices get extended (too high).  In addition, traders use options to hedge their bets, buying and selling calls and puts, or combinations of the two, to find ways to make money. 

            Personally, my opinion with trading is that whether you are buying or selling for the short term, or using options, an investor’s success is still based on their analysis of the security and the ability to hang in there if positions go against them.  To that end, I much prefer investing for a long period of time as I think there are far more benefits to be had with a longer term time frame.  My perspective is that the longer one extends their time horizon, the better chance they may have at finding a 2, 3, 4, 5, or 10 bagger (or maybe more).  As a trader, you might make 10-20 % in a short period of time and think you have done well.  Many investors have made 20-100X their money over a long period of time, and in my mind, that is a heck of a lot more appealing as one only needs one of these to maybe be set for a lifetime. Some may think I am a greedy pig, however, based on my experience; my perspective is probably not going to change. 

            Warren Buffett released his annual shareholder today, and as always, there are many nuggets of wisdom anyone would be smart to pay attention to.  I thought I would share one that I believe pretty much sums up the whole objective of investing.

            ‘We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries.  We backed this view with some purchases, but I should have done far more.  Big opportunities come infrequently.  When it’s raining gold, reach for a bucket, not a thimble.

            We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings of $17 billion.  Nevertheless, at year end 2009, our cash was down to $30.6 billion (with $8 billion earmarked for the BNSF acquisition).  We’ve put a lot of money to work during the chaos of the last two years.  It’s been an ideal period for investors:  A climate of fear is their best friend.  Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.  In the end, what counts in investing is what you pay for a business- through the purchase of a small piece of it in the stock market- and what that business earns in the succeeding decade or two.’  (Warren Buffett, 2009 Berkshire Hathaway Annual Shareholder Letter, Page 15, February 27, 2010.) 

The key points are simple and self evident as well.  First, fear is your friend, not your enemy.  Second, the business performance after you buy a stock is what matters, as well as what you pay for the business.  Third, when you see a big opportunity, take as big a swing as you can possibly take.  Ok, thanks for reading this month and as always, if you have any comments, questions, or concerns, or you would like to discuss your personal investment situation, please email me at yale@y-hc.com.