The stock market is down ~ 6% since our last update and as such, bonds have rallied. At the risk of stating the obvious, basic supply and demand gives a very top level approach to why. For example, depending on the figures used, 2009 saw an inflow to bond mutual funds of between $357 billion to $375 billion. This was the highest recorded since 2004. To date, we have seen around $150 billion flowing into bond funds, putting us just shy of those record numbers (if 2010 continues on this pattern). However, the record flows are not what are surprising. What is surprising is the level of yield investors are willing to accept in light of investment alternatives.

To illustrate, let us look at Johnson & Johnson. Currently JNJ stock offers a dividend yield of ~ 3.6%, while its bond, maturing in 2017, offers a yield of ~ 2.8%. So why would an individual investor make this choice? Possible explanations include a perception that the company will soon cut its stock dividend or a poor estimation of the underlying business risk. Being literally one of a handful of companies that have maintained their AAA rating and have increased their dividend every year since 1972, we do not see either of these being major risks. What we do see is that this example is one of many situations that represent a dislocation within the financial markets. Investors have given absolute preference to bonds over stocks. As is the case with JNJ, investors are saying they are willing to take a lower yielding investment and give up the potential upside appreciation in preference for holding fixed income. We would argue that owning the stock is a better (and more rational) investment decision.

Events like this show us how easy it is for market participants to lose sight of the big picture and focus on the news of the day. Although it can make it tough for rational investors to maneuver in the short-term, it does provide for long-term opportunities to build wealth.

Sincerely,

Your THOR Team

The extremes in the market in the recent past – overbought in mid-April and oversold just a couple of weeks ago – have dissipated. Volatility has fallen and the market has held support at a critical point 4 times, which is a good sign. It is not unusual (actually it is expected) to have a correction of greater than 10% in a bull market, especially when the initial run up stage has been completed. A correction in a bull market takes out some “froth” and rebuilds the market for the next up leg. The oversold/overbought conditions we look at are shorter-term indicators and currently show that the market is still oversold, but not at the extreme level they were just last week. The recent action in the market over the last few days is encouraging as we have seen lower volatility and steady upside performance.

Some clients have become very concerned about problems in the US and around the world. Yes, we agree that there are some major hurdles for the future: high unemployment, the potential collapse of the Euro, Middle East tension, increased government spending, inflation expectations, etc. These issues are real and significant. This cautious outlook by individual investors is why fixed income assets were at record levels in the month of May. However, investors that jumped out of the market early last week may have made a critical mistake. The market, as defined by the Dow Jones Industrial Average, is still 26% below its all-time high, is currently trading at a reasonable valuation, and should continue to see earnings surprise’s on the upside. US companies, growth companies in particular, have balance sheets that are in the best shape in decades and are cheap relative to the peers on the value side of the ledger. Additionally, interest rates are still very low and, in our opinion, will continue to be low for an extended period. Looking at the chart below shows the returns of various asset classes compared to the average investor. One can quickly see what short-term emotional decisions can do to the returns of the typical stock market investor.

Source – J.P. Morgan Guide to the Markets 2Q 2010

Our technical analysis of the market shows that the long-term uptrend of the market is still intact. Our analysis though requires us to be vigilant on a daily basis, looking for signs that might indicate a reversal of the current trend. The number one signal that would give us pause is if we started to see short term interest rates starting to rise. We don’t expect to see that in the near future. This may be the start of the proverbial “Summer Rally”.

Sincerely,

Your THOR Team

P.S. – If you get a chance, please give a warm welcome to our newest employee, Susy Hisch. She will be taking Mary Ann’s place at THOR and will likely be the first person you speak with when you call into THOR going forward.

Calm Waters ahead?

The past three weeks have probably been the strangest shift in individual investor psychology we have ever seen in our 24 years of investment experience. We went from a calm steady market to almost complete panic in three weeks. We now believe the market is trending to a more stable period ahead. To illustrate our point, consider the VIX, a widely followed index that measures volatility in the market The VIX was selling just below $16 on April 21st. Last week it peaked out just above $47 – a 300% rise – and is slightly above $30 – a 35% drop – today. The falling price of the VIX is a sign that volatility is coming down. That is a good sign. The last time the VIX was above $47 was in March 2009 and it gradually fell in price until April 21st of this year. Even though we had a good pop in the market yesterday, we are more encouraged by the fact that the volatility level is falling. The fall in volatility, an oversold condition and bouncing off major support are all good signs that the bull run that started in March of last year has not yet peaked.

Time to remember and thank our Soldiers

This weekend we at THOR will be remembering the sacrifices of the proud men and women that have given their lives for our country. This Memorial Day we will especially remember Jenna’s brother-in-law, who died in Afghanistan, and Brando’s sister’s boyfriend, who died in Iraq. It is because of their sacrifice that we as a nation are free. Not only do we remember the fallen, but we also give thanks to all our clients – and their family members – who have served (or who are still serving) in the military. Thank you.

Gratefully,

Your THOR Team