Don’s Outlook 7/31/09
Today we learned that second quarter GDP declined at a 1 percent annualized rate, better than expectations of negative 1.5 percent. US stocks failed to bounce, however, after trading flat throughout the week, essentially pausing after a strong month of July. The report pins the better-than-expected growth on the auto sector and smaller decreases in consumption and housing. Most of the growth came from higher government spending at the federal, state and local level.
Today we are selling the small position in Federated Prudent Bear Fund (BEARX), completing the sale of this defensive position, action we first took in April as the markets strengthened. We are buying Fidelity Select Automotive (FSAVX) with the proceeds. This unique sector fund topped the list of consumer-goods funds in the second quarter, and while FSAVX hasn’t drawn much attention in the past several years given poor performance in the industry, I believe it still presents an opportunistic investment.
The “cash for clunkers” program is perhaps the single most successful government stimulus to date. The program that began July 24 has fueled the recovering auto industry after heavy government intervention and reorganization. For more on this program and FSAVX, click here to review an article written for TheStreet.com.
Earlier this week, we sold Federated Kaufmann (KAUAX) and bought Federated Small Cap (FKASX) with the proceeds (please remember that we are able to buy these A shares on Fidelity’s Institutional platform without paying commissions). I wanted to increase portfolio exposure to small growth companies in the financial, technology, and industrial sectors. We have owned this fund in the past during other opportunistic periods.
Last month, we increased our weighting to ICON Asia-Pacific Region Fund (ICARX) in order to maintain exposure to a diverse swath of this fast-developing region, which includes significant positions in China, Hong Kong, Japan, South Korea, and Taiwan. China’s central bankers have pledged to maintain the country’s current monetary policy, which is highly accommodative and supportive of growth. This week Japan’s Nikkei Index reached levels not seen since last October.
Currently inflation adjusted yields are at their highest level in 15 years due to recent deflation, and this is an intermediate-term bullish case for high quality bonds. Investors bought heavily in the second quarter due to attractive yields and increasing risk appetite. In a deflationary environment, default risk is the top concern. Bernanke has said interest rates will remain low for some time, and it’s clear that the Federal Reserve does not anticipate inflation in the near future. For this reason, I have maintained our position in Federated High Income Bond (FHIIX), a fund that has returned 36 percent since its December lows.
