Monday, May 1, 2006

Private Client Letter on Volatility

Dear clients,

A few weeks ago when I sent you the newsletter "A Dose of Reality", I was in no way predicting the pullback in the stock market we've seen since then. I was however promising that "pull backs" of varying degrees are inevitable, in fact essential, to the health of the market over the long-term. Today's 150+ point drop in the Dow Jones Industrial Average (which amounts to around 1.5%) is being blamed on a weak consumer sentiment survey that was just released this morning. I say, regardless of the reason, a healthy pullback (or correction) at this juncture is probably a good thing, in that the market has gone over two years without the usual 10% correction (which historically comes once every 12 months).

With this in mind, please read the two following paragraphs taken from my January newsletter "9,000 or 12,000". The basic theme is that what we want to happen is whatever needs to happen to keep the markets and the economy healthy for the long-term investor.

Take care,

Taken from "9,000 or 12,000", January 2006
"You see, when the economy slows and businesses suffer, stock prices ultimately need to fall, accurately reflecting the true value of the underlying companies. When the economy moves ahead at a healthy (yet non-inflationary) pace, stocks should ultimately rise, reflecting an improving business environment. Trust me, you do not want the market to go up, year in and year out (besides, no matter how bad you may want it, it aint happening). May we never forget what can occur when the market fashions together a bull run that extends beyond what corporate and economic reality would suggest. We all saw the internet bubble burst in early 2000, catching many unsuspecting, tech-crazed investors off guard. Following a huge run up in stocks in the late nineties, that took the market to heights the underlying fundamentals couldn