Our Market Commentary

The first quarter of 2008 was an extremely difficult one for most investors. Nevertheless, we managed to keep ahead of the major market benchmarks.

The sub-prime lending fiasco, which got underway nearly a year ago, morphed into a liquidity crisis in the financial sector and has lead to a solvency crisis for some companies with heavy exposure to collateralized debt obligations. The poster child for this crisis has been Bear Stearns which unraveled in a matter of days. The old-line Wall Street house is now being acquired by J.P. Morgan Chase in what is in effect a Federal Reserve-backed bailout aimed at preventing much greater dislocations in the economy.

Mounting fears that the economy is in recession, or at least headed for a contraction, added to the stock market’s woes, causing shares to slip nearly 20 percent from their highs of last October.

Successful investing requires more than just making money in bull markets; protecting your assets in bear markets is equally important. And while we never like to give up ground, we are content in knowing that our emphasis on quality served us well once again in the first quarter.

We benefited from holding shares of companies with strong balance sheets and managements that do not take on excessive risk. We were also well served by increasing our exposure to the materials/precious metals sector in the period.

Outlook

Looking ahead, we can’t help but be somewhat optimistic. The stock market itself is perhaps the best indicator of what’s happening in the economy, and the message it’s throwing off is fairly bullish.

Those banks with little exposure to the sub-prime and Alt-A mortgages are much closer to their highs than their lows. Homebuilders, likewise, are well off their lows, suggesting that the market is already pricing in a turnaround in the sector. The same can be said for the economically sensitive transportation sector, which closed the quarter nearly 20 percent above their January lows. That’s just not the kind of action we would expect if the economy was grinding to a halt.  

The commodities markets are also telegraphing expansion rather than contraction. Copper, for instance, has remained persistently high, thanks to strong demand for this basic industrial input. There’s an old adage that the red metal has a Ph.D. in economics, and right now it’s clearly not looking for a prolonged slowdown.

Also telling is the price persistence of crude oil. While we could still see a sizeable, albeit temporary pullback this year, we would not expect crude prices to hold up as they have if the U.S. economy was headed for a severe recession.

Federal Reserve Chairman Ben Bernanke has his foot firmly on the proverbial monetary gas peddle. The stimulative effects of the Fed’s aggressive rate cutting, which began last summer, are only now starting to be felt in the economy. This being an election year Congress has also gotten into the mix: The government will soon start mailing out $170 billion in checks to taxpayers as part of its stimulus package, which should also help boost the economy.

Looking beyond our borders, nothing fundamentally has changed in the overall world growth dynamic – or in the commodity squeeze. As a result, we have not changed our focus away from franchise companies benefiting from the growth in overseas markets, along with companies levered to high and rising demand for energy and materials. We’re also poised to profit from bargains in strong businesses in the financial sector.

We’re not looking for a run-away bull market but stocks should have an upward bias in the coming months. Longer-term, we see rising inflation as the dominant theme for investors, and we believe that we’re well positioned to capitalize on that trend.

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Disclaimer: The specific securities identified and described herein do not represent all of the securities purchased, sold, or recommended for advisory clients, and that the reader should not assume that investments in the securities identified and discussed were or will be profitable. The mention of securities in this letter should not be deemed as a recommendation to buy or sell the securities. Leeb closely monitors the companies held in client portfolios. If a company’s underlying fundamentals or valuation measures change, Leeb will reevaluate its position and may sell part or all of its holdings.