Looking back at the 2^nd quarter can be described as watching a crab make its way across a beach.  There was a great deal of sideways action.  The quarter was then capped off by the Brexit vote.  When the news that British voters had decided to leave the EU sank in, equity markets took a step back but U.S. treasury markets soared.  The yield on the 10 year government bond hit record lows.  Good news for anyone hoping for a lower mortgage interest rate.  The Brexit vote was also the nail in the coffin for the Fed’s plan to raise interest rates this year.  Bad news for savers.

The 2^nd quarter earnings report showed the 4^th straight quarter with declining earnings and the 5^th straight quarter of declining revenue.  Earnings and revenue are expected to continue that tract into the 3^rd quarter reporting.  This is the longest string of declining numbers outside of a recession.

Through the 2^nd quarter equity markets failed to break through record highs set 15 months ago.    In fact, stocks have been the worst performing of the major asset groups.  Up just one percent for the past 15 months, stocks are underperforming long term treasuries and gold.

The market rally going into the 3^rd quarter was sparked by an increase in oil prices which lifted prices for energy related stocks.  That forced short sellers to rush to cover their short positions betting against the market.  The market was also driven by companies buying back their own stock.  The 2^nd quarter reached a near record in company buy backs.  The purchase of their own shares forced up the value of companies’ stock and reduced the number of shares actually available for trading.  That made market moves more exaggerated going into the 3^rd quarter.  The recent market upturn is on very low volume.

One other note, banks have been tightening their business lending through the 2^nd quarter.  That behavior is normally not seen outside of a recession.

Our portfolio now reflects a 20% exposure to the equity markets, 20%  in U.S. government debt, 22% in alternatives and the remainder in cash. All of our investment positions, with the exception of gold, pay a dividend.  The heavy cash position dampens not only the potential for loss in a market downturn but also the quarterly results being reported.  We continue to look for investments not correlated to the equity markets.  Should we see that there is a true breakout in the equities then we would invest.  Our concern remains that the equity market is built on a very flimsy foundation.  The avalanche of negative news stories, the political season and the growing issue of debt are a great recipe for market turmoil.  We will continue our bias toward preservation.