NOTEWORTHY

Current Thinking In The Context of Recent Market Activity

Recent volatility in global stock markets is a reminder of the 2008/09 economic crisis, but the comparables are, so far, suspect. Banks are in better shape, capital ratios are stronger, and we are unlikely to have a repeat of the sequential failures of storied institutions like Lehman, Bear Stearns, and AIG (among others.)

However, we can see this as another chapter in the unfolding story of developed economies grappling with an abundance of sovereign debt, playing out in the debt ceiling negotiations in Washington, European efforts to keep crisis in Greece from spreading into Italy and Spain, and continued weak governments in Japan. More broadly, we can see this as conflict between generations: in Southern Europe, generous pension and healthcare benefits are coupled with 20% youth unemployment. In the U.S., we are deferring infrastructure investments vital for a competitive economy. While there are roadmaps for solving the U.S. budget and deficit challenges, governmental impediments will make a European solution more challenging.

In the meantime, we remain in a near-zero interest rate world with commensurate low rates paid to bond holders and other savers. This is likely to continue well into 2012, if not 2013.

Notwithstanding, the recent sell-off in the U.S. market brought stocks back to their level of eight months ago, and they are still two-thirds higher than the crisis lows. Our stock selection is carefully constructed on a portfolio basis; some companies are indeed dependent on a measure of economic growth, which will return in time, and we will hold and/or add to these positions. Other stocks have characteristics less geared to GDP growth with their own unique drivers, and we also own stocks for income in a yield-starved world. We believe it all fits together and should continue to provide good returns over time; these oscillations never occur in a vacuum, and we work to take advantage of mis-pricings aided by our long-term perspective.