Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : April 2010

What's new at J.P. King & Associates, Inc.?

We begin with a special welcometo the six new clients who joined our firm this quarter. We’re pleased to welcome them aboard and look forward to a successful, long term relationship. Thank you to our existing clients for the great referrals we continue to receive.

As financial planners, we often counsel our business owner clients in the area of contingency succession planning; that is, in the event of an owner’s incapacity or death. Many times this scenario can be protected against by using a proper buy-sell agreement, along with key-man life insurance. These plans are extremely useful in providing a smooth transition for clients and employees alike, and protecting the business value for the owner’s family. We are pleased to report that Jim and Scott are putting the finishing touches on their own buy-sell agreement. In the unlikely event of either Jim or Scott passing away, or no longer being able to work, this document provides for the seamless transition and continuation of J.P. King & Associates, Inc. We want you to know that if something were to happen to either one of us, the disruption to the firm’s operations would be minimal.

On a personal note, Jim will happily be travelling back east in late May to attend the graduation of his youngest son from Tufts University. At the other end of the curve, Scott’s daughter will be “graduating” from pre-school and beginning kindergarten in the fall. Both dads are very proud.

Looking Back

The economic recovery and parallel bull market in stocks continued throughout the first quarter of 2010. U.S. stocks, somewhat surprisingly, performed quite well, with the S&P 500 Index gaining approximately 5% for the quarter. More impressive is the fact that through February the S&P 500 Index was actually negative, meaning all the positive return came in March. Talk about a spring bloom! International stocks did not fare as well, with a slightly positive return for the quarter, this after being down about 5% through February. The main reason for the difference between U.S. and Foreign stocks was that the U.S. dollar rose in value over 4% relative to foreign currencies, putting downward pressure on international stock prices and commodities as well. On a positive note, a big contributor to performance was small cap U.S. stocks. Our small cap investments were up over 9% for the quarter. Another bright spot was our global bond fund, Templeton Global Bond. This fund, held in most of our investment models, was up approximately 6% for the quarter, despite global interest rates rising. It’s worth mentioning that the fund is paying interest income of over 4% annualized. We spent some time with an analyst from this fund during the quarter and came away impressed with their positioning and approach. Their current thesis is that global interest rates will continue to rise and they have positioned the portfolio accordingly. Being a global bond fund they have a much larger investment playing field than a U.S.-only bond fund, with more opportunities and ways to position for rising rates. We continue to believe this fund will deliver outstanding results. We are pleased to have access to this fund, as it is not accessible to retail clients; it is only available on institutional platforms.

Overall, the first quarter of 2010 was good, with all of our investment models having positive returns.

Looking forward

Last quarter we summarized our outlook as cautiously neutral. We still have a conservative bias as we believe the weight of the evidence points to a tough road ahead for the economy and financial markets. This is despite the economic recovery clearly underway, albeit a recovery that has been largely government supported. Our current concerns revolve around the combination of fair to rich stock price valuations, somewhat overbought conditions, rising interest rate pressures, potential fresh credit difficulties, persistent high unemployment, and the incredible, unsustainable explosion in U.S. Government debt.

The outlook is not entirely gloom and doom. There are some optimistic signs to look at. Strong emerging market economies are feeding back into the global economy, which is a positive for exports and manufacturing. Inventories are low and rebuilding, which will continue to support growth. Corporate profitability worldwide is quite strong. Some leading economic indicators suggest a substantial labor market recovery could occur.

Looking ahead, we continue to expect that the greatest investment opportunities will come from abroad. We believe that the recent rise in the U.S. dollar is a short term phenomenon, rather than a longer term trend. We view this as an opportunistic time to add to foreign investments. Our research concludes that it makes sense going forward to invest directly in diversified Asia. We are planning in the near term to introduce a new fund, Matthews Asia Dividend, to the majority of our portfolios. We like this particular fund for two reasons: first, it’s a direct investment in diversified Asia, which as a region is projected to have the highest GDP growth rate in the world over the next 3 years, (even higher than emerging markets); and second, this fund invests in companies that pay strong dividends. The current annual dividend yield on the fund is almost 4%, (more than double the dividend yield of the S&P 500 Index).

We are also planning some allocation adjustments within the bond portion of our portfolios. First, we plan to increase our allocation to global bonds. This is to take advantage of the greater opportunities in bonds that we see globally. Second, in our most conservative, bond heavy portfolio, (Income and Preservation), we plan to introduce a new fund, Ridgeworth U.S. Government Ultra-Short Bond Fund. This is to shorten the duration and average maturity of the overall portfolio, making it less susceptible to principal erosion due to rising U.S. interest rates. Before making any of these changes, we will email an Investment Bulletin for your review, with greater detail and explanation of the adjustments we are planning.

At this point we feel there’s a better than 50% probability we are in the latter innings of this cyclical bull market. It’s unlikely that stocks will continue straight up, as they have for the past twelve months. As the economy shows signs of improvement, the likelihood of the Fed tightening and rising interest rates could be a catalyst for fresh concerns. There’s a reasonable chance we will see a meaningful correction (10-15%), or even a bear market (15-20%) later this year. If this happens we expect our portfolios would decline much less than the stock market. Also, as uncomfortable as it might be in the short run, opportunities would be created for us to add significant value with our asset allocation, manager selection, and tactical adjustments.  

We would enjoy discussing any of our comments in greater depth with you. We encourage you to call with any questions you may have or to schedule an appointment for a more in-depth review of your situation. As always, we appreciate your confidence and trust.

James P. King, CFP^®, Scott Horton, CFP^®
April 6, 2010