Monthly Market Review May, 2010 - Time To Dwell

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April was chaotic. Corporate America weighed in on its view of what type of recession we have – a V. Indeed, based on the reported first quarter earnings of 2010, the S&P500 companies delivered broad based earnings growth, 10 out of 11 sectors, and registered aggregate earnings growth of 56% from the year ago quarter. In addition, almost 79% of companies are experiencing positive sales growth and the aggregate level of top-line growth is around 13%, well ahead of the consensus 10% growth expected heading into the quarter. Also in the month, Goldman Sachs was charged by the SEC for defrauding investors by misstating and omitting key facts about a synthetic CDO product related to subprime mortgages. Later, S&P cut Greece's ratings to junk status, and downgraded Spain from AA + to AA. Regardless, the S&P500 managed to return a positive 1.48% in April, as investors’ confidence for “fundamentals” prevailed over regulatory risks looming for the financial industry and sovereign risks in Europe. While earnings are reflection of fundamentals, prospect for fundamentals could change fast. The first week of May just shows how fast the perception of sound future prospects can change. Worries about the European sovereign crisis accelerated, resulting in a weekly loss in the global equity market, with EFA losing 9.5% and the S&P500 down 6.4%. The European Union was rushed to pass a bailout package worth nearly $1 trillion over the weekend. Market cheered at the news, not surprisingly, as bailouts have always been well received upon announcement, leaving longer term hazards to be sorted out later.

Time flies, and with joy we look forward to our 2010 annual client conference in Las Vegas in June. As we will be busy preparing for the conference in the month ahead, we cut this month’s letter short, and will not release a MMR in June. Our July newsletter will share some key insights from the conference and start to provide you our take on some of the key questions we think will shape investment returns for the rest of the year and the longer term future.

In the short term, we believe the US equity investors will have to dwell upon the following 2 questions:

1. Is the US equity market overbought?

2. Is risk given sufficient respect after our 14 month market rally, and in particular the amazing run by lower quality companies?

In the longer term, we believe investors around the world will have to think hard and develop an investment action plan for the following questions:

1. Are governments around the world equipped with the capacity to practice financial discipline?

2. Is sovereign risk an inherent birth defect of the European Union?

3. In the US, while it seems that corporations learned the lessons from the Great Recession and are successfully deleveraging and becoming more efficient, can our governments at the Federal, State, and municipal levels do the same and end their slothful and gluttonous spending habits to balance their budgets and reduce debt load?

Here is an interesting chart from our recent Market Forecast Project – back in November sentiment was starting to strongly shift away from the Euro.

http://valueexpectations.com/blogs/market-forecast-project-%E2%80%93-majority-investors-predicted-rise-usd-euro-ratio-december-200905122010

If we do not see you at The Encore, have a great start to your summer!

From March 31 to April 30 of 2010, the returns are the following:

AFG Portfolio Returns