Wednesday, July 28, 2010

2010 Mid-Quarter 1 Update

March 2010

We have not updated our clients in a while and thought that now would be a good time to do so. As you know, 2008 and 2009 were extremely difficult years in both the U.S. and the rest of the world as it relates to the economy. After beginning the year in a very difficult manner we were fortunate to have held our ground and to have generated very strong returns for our clients in 2009. At times we know that it may not have been easy to stick with the strategy that we had implemented in 2009 and we certainly apologize for any anxiety we may have caused, however we are grateful that you chose to stick with us and therefore were able to reap the rewards that followed. While we are relieved to have put 2009 behind us we are excited about the coming year for many reasons.

We believe that 2010 will likely be a challenging year for the overall stock market. There remains a great deal of uncertainty regarding the speed of our economic recovery both at home and abroad. As a result of this economic uncertainty we are of the opinion that positive investment returns will be achieved by making investments in assets which are not dependant on the broader markets to make money. We are currently invested in many such opportunities, one of which being General Growth Properties. General Growth is the second largest shopping mall owner in the United States that was forced to file for bankruptcy protection in early 2009 as a result of the credit crunch. The company was unable to refinance the debt that it had coming due at that time and therefore chose to enter bankruptcy in order to force the creditors to negotiate with them. In other words, the company’s business was not the issue but the timing of its debt maturities which came due at the worst possible point in time. Our opinion therefore was that the business model was still intact and once the debt could be negotiated the company would emerge in a very strong position. To date our analysis has been correct as we began buying shares in General Growth as low as $2.50 mid last year. The equity now trades at roughly $13 and still has room to go in our estimation as the majority of its debt has been re-negotiated and competitors are now placing bids to buy the company before they exit bankruptcy court.

Another example of the type of non-correlated assets we are investing in would be reverse convertible bonds. These are fixed income instruments that we put together ourselves that pay us very high interest rates and are short term in nature. These bonds are structured around a single company (for example IBM) and pay cash or stock at maturity depending on the performance of the underlying security. Most of these securities pay up to 3% per month and typically are structured to have a life of three months. Annualizing this number would yield 36% a year, a very attractive number by any measure for what we believe is a low risk proposition (if you are interested in hearing more about how these securities work please don’t hesitate to contact us for a more detailed explanation). Of course the above examples are just two of the many we are currently investing in and we continue to search for more.
And now on to a housekeeping item. As you are aware we custody all of our clients’ assets at Fidelity Investments. We have no affiliation with Fidelity however when they change their commission structure it affects all of our clients. Fortunately Fidelity has chosen to lower its commission levels and that is a huge positive. In order to take advantage of the lower commission structure, each client must agree to receive their monthly statements and trade confirmations by email. We will give Fidelity each of your email addresses and they in turn will email you directly asking for your consent to receive all of your information electronically. While Fidelity’s commission rates have always been quite low, we are excited to see the opportunity for our clients to pay an even lower rate. If you would like to update your email address with us or if you would like the statements and trade confirmations to go to a different email please let us know. Of course your quarterly statements from Phillips Ray will not be affected by this change however we can email those to you as well if that is your preference. The new commission structure goes into effect on March 15, 2010 so please respond to Fidelity’s email when you receive it.

On a final note, we are most grateful for the referrals that we have been getting from you over the years. There is no greater compliment that we can receive than to have a client pass our name along to someone they care about and feel might benefit from a relationship with us. Please continue to pass our name along to those you think might be looking for help with their investments. We assure you that we will work hard to take care of anyone’s needs that you choose to refer to us. We would also like to hear from you if there is anything that we can do to better meet your own needs.


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