Hamilton Point Flash Report

August 8, 2011

As the stock and bond markets open today we can expect volatility to prevail as we all adjust to the precedent setting — and humiliating —downgrade in America’s debt rating and to ongoing troubles with Europe’s debt and banking problems.

As for the drop in our debt rating, S&P’s action should not be misconstrued as the cause of a problem, but rather it is the outcome of what has concerned so many of us about our nation’s fiscal path for so long—not just recently. In that sense, this downgrade is not “new information” that should cause one to greatly re-think their long-term view unless they were ignoring these troubling signs previously. Thus, we expect a “bumpy” ride, but do not see any great immediate fallout even though business academia and insurance company regulators will have to deal with new definitions and reserve requirements now that the “risk free rate,” heretofore defined as US Treasuries, has disappeared.

Speaking specifically to our country’s fiscal path, it seems every American except those that serve us in Washington knows that painful changes must take place to get us on a more sound financial footing. Yet we know from experience that Washington does not “anticipate and lead” but rather reacts only when faced with a crisis. Perhaps the stock market drop last week and the embarrassment of our debt rating will serve up the crisis needed for Washington to act? Let’s hope so, though the early signs show they seem to be more interested in continuing to bicker over who is to blame instead of recognizing they are all on the SAME team and are all responsible.

Meanwhile, Europe remains a mess with countries like Italy and Spain acting like the next Greece, except that they are much larger economies and thus more problematic to deal with. At least in the short-run, this is a greater cause for concern than the U.S. debt rating issue which is more a matter of semantics at least for now. More closed door deliberations by France and Germany over the weekend will likely lead to more bailouts and new definitions for financings that are carefully structured to avoid use of the word “default.”

At Hamilton Point we have been skeptical since 2008 as to whether the developed world’s economies can grow absent government stimulus. As countries like the USA, Japan and those in Europe realize that they must restructure and stop leveraging themselves at the government level, we continue to expect slower growth going forward. Thank goodness for the momentum established by emerging countries that are growing slower than at their peak, but are still highly likely to expand in the coming years.

Tactically speaking, we trimmed some equity exposure in non-customized accounts a few weeks ago and therefore have cash to reinvest when valuations hit our targets. Reflecting the level of skepticism we have maintained throughout the supposed “recovery,” we remain “underweighted” versus equity targets; still own no banks, brokerages or insurance companies; and continue to avoid the most cyclical industries like autos, airlines and others dependent upon the developed market consumer. We also remain well-diversified with holdings in gold, timber and exposure to other real assets since, over the long-term, these assets can serve as a “store of value” when governments print money. 1

Thanks for your confidence in Hamilton Point’s philosophy of diversification and quality. Your telephone call is welcomed at any time and we are pleased to offer this communication during these difficult times.

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  1. For a full list, free of charge, of all recommendations made by Hamilton Point for the investment strategy shown during the last year, please contact us using the contact information herein.