Whoa...Slow Down There, Cowboy!

I'm about to head off on a nice week to the beaches of San Diego with my family. But before I go, I thought it important to remind our clients and readers of our outlook and tactics for portfolios.

At the top of most folks' minds at the moment is the historic rally in the stock market since its bottom in early March. A 50%+ rise in so short a period has only been matched one previous time in the last century. I'm getting calls even from conservative investors imploring me to get heavily back into stocks. Momentum is a very real effect on near-term stock prices and it's not to be ignored. Stocks surely could continue to rally strongly as the year rolls on.

But we don't think it is worth the risk. First, and most importantly, we now believe that stocks have pushed past fair value. As Jeremy Grantham recently lamented, stocks spent about 15 years being overvalued. They went below fair value for all of a couple of months and are now look modestly expensive again. Life's not fair.

In our opinion, fair value for the S&P500 is around 925 (it's at 1000 today). Important to note is that our view of fair value already assumes a full earnings recovery. It's not like we think the market is worth 925 based on today's temporary depressed earnings -- we think that is the right price after earnings recover from the recession. The recent good earnings reports are merely the path back to normal earnings. These earnings reports do not warrant pushing the S&P500 back over 1000.

The second point I'd like to make is that, while stocks have had a huge rally from the March bottom, they are only up about 11% year to date*. We ask the question: Since we have been underweighted in stocks, how have the assets performed that we bought instead of stocks. Quite nicely, thank you.

What we bought with money that would otherwise be in stocks:
Foreign Bonds = up 15% year to date
High-Yield Bonds = 32%
Energy Stock Fund = 26%
Natural Resource Fund = 37%
Muni Bonds = 10.2%

(*Vanguard S&P500 Index Fund returned 11.03% through 7/31/09)

So, while the stock market has had a sharp V-shaped year, our average client has had a far smoother ride and has ended up at a slightly higher point.

The standard disclaimer applies: Past results are not necessarily indicative of future performance. All investments bear risks. For a complete description of Creekside's performance composites, you can email me at rick@creeksidepartners.com.

Again -- and this is very important -- we believe that the S&P500 at a price of about 925 is the fair value of the market after a full recovery from the recession. That's why we're willing to pay that price today. But we are not terribly willing to make full allocations back to stocks at a price closer to 1000.

Cheers,
Rick