What’s the market been like?  Well, at the beginning of some professional wrestling shows the ringside announcer will yell: “Are you ready to RUMMMBLE?!”  It’s been kind of like that.  The bulls and bears have been rumbling back and forth, sending the market, and many people’s nerves down to the mat.

 

We officially entered a ‘correction’ in the market.  That is defined as a 10% or more pullback in the stock market across all three major indices.  This is the first correction since March 2009.  Overall, corrections have usually been seen as healthy breaks in a market as it catches its breath.  Corrections in the past have had the beneficial impact of flushing out pretenders and allowing the stock market to build a base for new highs. Sunday's Charlotte Observer had a quote from a market watcher: "History shows that drops of 10 percent or more are almost twice as likely to be followed by a resumption of rapid price growth as they are to usher in a bear market, a decline of 20 percent or more."

 

Much of the recovery in the stock market since March 2009 has been in stocks of companies with poor or low quality earnings.  Those needed to be flushed out.  If you look at the companies that have run the fastest since last year's market bottom, they generally do not have very strong balance sheets. Their gains often have resulted from business reorganization, not real gains in business.  The companies with strong balance sheets, large free cash flows, and growing market shares in their businesses have tended to lag.  

 

 

I like real growth, not growth that has been created by reorganizations – ‘smoke and mirrors.’ I think this downdraft will turn the focus toward companies with high quality earnings and sustainable business models.  In one word, quality. As so many stockholders have hit the exits, it seems that the good economic news or corporate earnings have been completely ignored.  We fixate on European debt issues and the possible fear of contagion.  I feel that Europe will work out its problems and what will remain is a broad based recovery that is taking place in our country.  As people question European financial issues, our country looks like a reasonable haven for investments by comparison.  

 

 

I firmly believe we are on a global economic upswing as opposed to heading down again. I made some portfolio changes earlier this month. I focus on fund managers who manage their portfolios with a bias toward companies with high quality earnings.  An example of this would be Blackrock Equity Dividend (MDDVX) fund.  This fund has done poorly over the past year, but it has risen to the top quartile of funds in its category over the past month.  The fund has consistently been in the top quartile on a 3, 5, 10, and 15 year basis. I see this as: ‘high quality; good long term record.’  I held onto to this fund over the past year knowing that the manager has a winning formula for picking stocks and that does not go out of style.

I’ll have some new ideas for you, too.  Recently I attended the National Conference for NAPFA (National Association for Personal Financial Advisors).  This conference provided interesting insights about the way this tough market has changed much more than stock and bonds.  For instance, there are some changes in the pricing of certain insurance products that are affected by trends in our overall health and as well as the market.  Insurance, of course, is one facet of a personal financial plan.  I am digesting some of the trends we learned and will roll out some ideas soon. I want to take advantage of every financial opportunity for you, not just those on a stock exchange.