The broad stock market, as measured by the S&P 500 index, ended 2011 virtually unchanged, clearly not reflecting the tumultuous price swings witnessed during a year that included numerous events worthy of being considered the top story for an ordinary decade. As indicated in previous quarterly correspondence over the past 12 months, there are many reasons for concern, some with material consequences capable of derailing the fragile U.S. economy, but stock valuations remain quite compelling. Stocks are now even cheaper than 12 months ago, following a year of earnings growth for the S&P 500 that likely will average 16%.
It seems that investors spend too much effort assessing individual issues that can be identified as carrying meaningful risks when, on balance, there are several core inter-related factors and the conclusion is that the world is simply a riskier place. This applies to physical safety, as well as the uncertainty concerning principal risks for various investments. On a global basis there is political unrest and unmanageable debt on many fronts, which are unlikely to be resolved anytime soon. When one accepts the fact that, adjusting for long-term inflation, there are no true safe havens, it becomes easier to make intelligent long-term investment decisions by balancing risk factors.
At the top of most lists is the concern over the collapse of the Greek sovereign debt and the dire conditions of other, more significant economies in the Eurozone. Each measure created to firm up the troubled Euro currency, has only provided a short reprieve from the continued spread of concerns that others will default and push the currency to the brink. In New Year's messages throughout Europe, leaders called on their people to accept tighter austerity programs to preserve the future of the next generation, but in practice such programs have been difficult to maintain. Strong countries like Germany are committed to preserving the Euro, and to sustaining powerful positions in the global export market, but as interest rates and unemployment levels continue to rise to unacceptable levels in large countries like Italy and Spain, there are likely to be more challenges ahead.
In a related note, it seems the most over-played top story has been the debate over the downgrade of U.S. debt. It bears repeating that the United States is approximately 25% of global GDP and by far the most liquid and consistent investment safe haven. The political embarrassment surrounding failed attempts to balance the budget notwithstanding, the U.S. by definition should hold the highest debt rating. There are appreciable risks in holding any long-term maturity debt in the current near zero interest rate environment, following a year when the total return on 30 year Treasuries was 35%, but this is a consideration of duration and interest rate risk, not issuer quality and default risk. The greatest risk to U.S. debt in the intermediate term is the likelihood that investors will be attracted to higher risk alternatives when global fears subside. In the long run, our ability to control our own debt and co-exist with a powerful China will determine the standard of living for our next generation, but this will have less impact in the year ahead.
The death of Osama Bin Laden appeared to help the U.S. war on terror, but regime change in Egypt and Libya, ongoing unrest in Syria and persistent problems in Pakistan and Afghanistan appear to make the Arab Spring far from a welcome change. The greatest threat, however, involves Iran, which has attempted to flex its muscle in the region in response to sanctions imposed to stop their nuclear program. This is a troubling situation that may need to be dealt with fairly soon and can have a dramatic impact on energy prices. In addition to the numerous aforementioned concerns, the past year brought humanitarian support for Japan following the earthquake and subsequent nuclear disaster. The disaster also brought disruption to U.S. businesses dependent on Japan for supplies and customers, as did the devastating floods in Thailand. Adding the recent death of Kim Jong-Il, many prominent risks are evident for the year ahead. Yet the past year provides typical insight, where the issues of greatest concern were unknown at the start of the year and what appeared to be the most troubling issues generally subsided.
On the domestic front, we are entering another Presidential election year, which somehow seem to occur much more frequently than every fourth year. Unemployment should remain stubbornly high as the economy continues to de-lever and too much uncertainty remains over taxes, regulations and the budget. It seems as though many metrics have bottomed, but there are no visible catalysts to suggest a swift recovery, nor one that would withstand a global shock. Housing shows some signs of stabilization, but there is pent up sales demand that casts a pall over encouraging data, such as the number of newly formed households finally exceeding new construction units. The consumer may continue to struggle, but corporate America remains flush with cash and very lean, suggesting an ability to grow earnings further, albeit at a slower pace than the past few years. This bodes well for stocks, with the S&P 500 now trading at a historically attractive multiple of 11.7X 2012 estimated earnings.
The prospects for strong real and relative returns are excellent in the year ahead. Earnings growth is expected to slow and companies with consistent, visible profitability should lead the market, which bodes well for the Oak Ridge investment style.
We sincerely appreciate your continued confidence in Oak Ridge and offer our best wishes for a healthy and prosperous New Year.
Sincerely,
David M. Klaskin
Chairman and Chief Investment Officer
* A list of sector performance and composite performance in the Oak Ridge All Cap Growth composite is available upon request. The information in this letter does not represent a recommendation to buy, hold or sell any securities.
INVESTMENT Commentary
as of December 31, 2011
Dear Client,
The broad stock market, as measured by the S&P 500 index, ended 2011 virtually unchanged, clearly not reflecting the tumultuous price swings witnessed during a year that included numerous events worthy of being considered the top story for an ordinary decade. As indicated in previous quarterly correspondence over the past 12 months, there are many reasons for concern, some with material consequences capable of derailing the fragile U.S. economy, but stock valuations remain quite compelling. Stocks are now even cheaper than 12 months ago, following a year of earnings growth for the S&P 500 that likely will average 16%.
It seems that investors spend too much effort assessing individual issues that can be identified as carrying meaningful risks when, on balance, there are several core inter-related factors and the conclusion is that the world is simply a riskier place. This applies to physical safety, as well as the uncertainty concerning principal risks for various investments. On a global basis there is political unrest and unmanageable debt on many fronts, which are unlikely to be resolved anytime soon. When one accepts the fact that, adjusting for long-term inflation, there are no true safe havens, it becomes easier to make intelligent long-term investment decisions by balancing risk factors.
At the top of most lists is the concern over the collapse of the Greek sovereign debt and the dire conditions of other, more significant economies in the Eurozone. Each measure created to firm up the troubled Euro currency, has only provided a short reprieve from the continued spread of concerns that others will default and push the currency to the brink. In New Year's messages throughout Europe, leaders called on their people to accept tighter austerity programs to preserve the future of the next generation, but in practice such programs have been difficult to maintain. Strong countries like Germany are committed to preserving the Euro, and to sustaining powerful positions in the global export market, but as interest rates and unemployment levels continue to rise to unacceptable levels in large countries like Italy and Spain, there are likely to be more challenges ahead.
In a related note, it seems the most over-played top story has been the debate over the downgrade of U.S. debt. It bears repeating that the United States is approximately 25% of global GDP and by far the most liquid and consistent investment safe haven. The political embarrassment surrounding failed attempts to balance the budget notwithstanding, the U.S. by definition should hold the highest debt rating. There are appreciable risks in holding any long-term maturity debt in the current near zero interest rate environment, following a year when the total return on 30 year Treasuries was 35%, but this is a consideration of duration and interest rate risk, not issuer quality and default risk. The greatest risk to U.S. debt in the intermediate term is the likelihood that investors will be attracted to higher risk alternatives when global fears subside. In the long run, our ability to control our own debt and co-exist with a powerful China will determine the standard of living for our next generation, but this will have less impact in the year ahead.
The death of Osama Bin Laden appeared to help the U.S. war on terror, but regime change in Egypt and Libya, ongoing unrest in Syria and persistent problems in Pakistan and Afghanistan appear to make the Arab Spring far from a welcome change. The greatest threat, however, involves Iran, which has attempted to flex its muscle in the region in response to sanctions imposed to stop their nuclear program. This is a troubling situation that may need to be dealt with fairly soon and can have a dramatic impact on energy prices. In addition to the numerous aforementioned concerns, the past year brought humanitarian support for Japan following the earthquake and subsequent nuclear disaster. The disaster also brought disruption to U.S. businesses dependent on Japan for supplies and customers, as did the devastating floods in Thailand. Adding the recent death of Kim Jong-Il, many prominent risks are evident for the year ahead. Yet the past year provides typical insight, where the issues of greatest concern were unknown at the start of the year and what appeared to be the most troubling issues generally subsided.
On the domestic front, we are entering another Presidential election year, which somehow seem to occur much more frequently than every fourth year. Unemployment should remain stubbornly high as the economy continues to de-lever and too much uncertainty remains over taxes, regulations and the budget. It seems as though many metrics have bottomed, but there are no visible catalysts to suggest a swift recovery, nor one that would withstand a global shock. Housing shows some signs of stabilization, but there is pent up sales demand that casts a pall over encouraging data, such as the number of newly formed households finally exceeding new construction units. The consumer may continue to struggle, but corporate America remains flush with cash and very lean, suggesting an ability to grow earnings further, albeit at a slower pace than the past few years. This bodes well for stocks, with the S&P 500 now trading at a historically attractive multiple of 11.7X 2012 estimated earnings.
The prospects for strong real and relative returns are excellent in the year ahead. Earnings growth is expected to slow and companies with consistent, visible profitability should lead the market, which bodes well for the Oak Ridge investment style.
We sincerely appreciate your continued confidence in Oak Ridge and offer our best wishes for a healthy and prosperous New Year.
Sincerely,
David M. Klaskin
Chairman and Chief Investment Officer
* A list of sector performance and composite performance in the Oak Ridge All Cap Growth composite is available upon request. The information in this letter does not represent a recommendation to buy, hold or sell any securities.