2600 Tenth Street, Suite 607 • Berkeley, CA 94710 • (510) 368-
June 30, 2011
The past quarter was a rocky one for stocks, with several ups and downs. It was also an unusual one for my management, as I elected to hedge against the upcoming debt ceiling vote. The debt ceiling vote is one of those rare market events that we can see coming from a long way off. I have decided, after many hours of research, that there is some probability that debt holders will panic before Congress reaches a deal on the debt ceiling. If there is a panic, there is a good chance for another financial crisis. While I do think a deal will get done, the risk is high enough that I created a hedge in your portfolio this quarter. If a financial crisis does happen, your hedge will gain considerable value, and we’ll be able to sell the hedge and load up on stocks while the market is depressed. This would put us way ahead on our long term growth plan. Of course, the best case scenario is still that a deal gets done quickly, and we can drop our hedge, and reinvest in stocks at current levels.
My hedge strategy is insurance against a singular event, and I will continue my buy
and hold stock strategy over the long term, because ultimately stocks, and many small-
Despite the looming debt ceiling vote, much of the past quarter’s volatility owes to the market’s attempt at digesting a slowdown in economic indicators (and to some extent Greek debt issues). It’s worth noting that of the past 10 recessions, at least six have seen a major slowdown in the middle of what became an otherwise solid recovery. One of the factors contributing to the recent economic slowdown is a drop in the housing market. The housing situation isn’t a good predictor of the overall economic recovery. It does, however, have a role to play, and I thought it might be helpful to look at the current state of that industry.
Housing is no different than other assets: long term health rests on valuation. The good news is that housing valuations nationwide now look good. Home prices as a percentage of average income, for example, are now below historic averages.
Nationwide averages, however, can be misleading. Housing's prospects rely overwhelmingly
on location. Here, the news is more mixed. The rough historic rule of thumb is
that renting is preferable to owning when the price-
Even where prices look reasonable, they could always get more reasonable. Prices don't tend to simply fall back to averages after bubbles burst. They drop below average and stay there for a while. Many housing economists don't expect the nationwide market to return to normal until the summer of 2012 at the earliest. I expect that’s probably accurate.
The bottom line is that we still have a ways to go with this recovery. Once we get past the debt ceiling vote, we turn our attention again to taking advantage of the soft spots in our economy and the opportunities those soft spots create in certain markets and with specific companies; all the while looking for value.
As always, I’m available to answer any questions you might have.
Regards,
Aram Durphy
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