“Before anything else, preparation is the key to success” – Alexander Graham Bell
“Chance fights ever on the side of the prudent” – Euripides
Back in November-December 2009, I made the decision to lighten our exposure to stocks. The S&P 500 was around 1100 and up considerably from it’s low of around 670 in March. Since that time, we have experienced a trading range, basically from 1100-1200, and volatility has increased.
On May 4th, I sent out a client email that said “The last two weeks, we have seen increased volatility in the markets, with several daily movements greater than one percent. This volatility indicates to me that we are possibly hitting a ceiling in the equity markets. Combine that with the prospect of higher interest rates, and a lack of increased sales, I do not have a lot of optimism for much more upside.” Well, volatility has not subsided, and the S&P 500 today closed down 3.9% at 1071.59.
When I made the decision at the end of 2009 to sell off a good portion of our stock allocation, I was concerned about several things:
- Lack of corporate revenue growth
- Low interest rates
- High levels of debt
These are now the issues causing much of the volatility. Our preparation may have been a bit premature, but I believed they were the most prudent thing to do at the time, and it appears to be playing out.
As I have said before, I’m willing to give up a bit of top line growth to cushion a much greater loss. The uncertainty in Europe, combined with increased unemployment in the States and a lack of revenue growth will, in my opinion, perpetuate this volatility and downward trend for the immediate future.
I cannot guarantee above-average returns, but I am confident that our portfolios are structured to weather this storm because we have made prudent moves to do so. As a firm, we have a fiduciary duty to invest in our clients’ best interests. I believe that now is not the time to take exceptional risks but to play defense, and that is what we are doing.
It’s ironic, isn’t it? Not a month after the White House announces the opening of the Atlantic coast to oil exploration, an offshore platform explodes, and suddenly we have, by some estimates, as much as 20,000 barrels a day of oil flowing into the Gulf of Mexico.
The big oil companies have told us that these offshore platforms are safe, equipped with multiple safeguards to ensure that if an accident happens, very little environmental damage can occur. Right. BP, Halliburton and any other company involved has to be held accountable, as do the regulators.
Below, I will layout my best case scenario as a result of this event. The worst case scenario has already happened.
This event will finally change the American way of thinking. Never again you hear as you walk down the street. Both parties come together to recognize that we can no longer play russian roulette with our energy policy. Tough choices will need to be made. The argument has been made that increasing taxes on fossil fuels will hurt the economy, but obviously events like this have the potential to have an even broader impact on the economy. So, a national fossil fuel tax is implemented with the sole purpose of funding R&D into clean energy technologies and efficiencies. A side effect is that people think just a bit more about their choices: do I take the SUV to the store or do I take the bike? Energy efficiency is given a second look: the cleanest unit of energy produced, is the one that doesn’t need to be produced.
Because of this new imperative and funding, the US regains it’s lead as a technological leader. Markets open up to the new clean fuel revolution coming from The States. Jobs are created in research and manufacturing. Energy efficient products have now relieved us from having to build additional coal-burning power plants. I think you get the idea…
The reality is that it will take some political vision, some fortitude of spirit, and some common sense. We can move away from our reliance on fossil fuels, and it is unfortunate that an event like we have seen in the Gulf has to happen. But, let’s not have it be for naught. Let’s come together as a country, develop a truly comprehensive policy focusing on efficiency and clean energy, and make it work. Our future depends on it.