A Technical Bounce

The S&P 500 posted a much welcomed +15.9% return for the 2Q and is now up +3.2% for the year. With this recent climb, the S&P 500 is now up +36% from its March 2009 lows but still down -41% from the all time highs set 18 months ago. While we are certainly glad to see the market rebound, that bounce upward is based less upon a true economic recovery (growth in earnings) and more on the fact that the market had simply become too cheap in March -- a technical bounce rather than a fundamental recovery.

There is, however, genuine good news. The financial sector returned +35% in the Q reflecting increased stabilization. Remember last October when every day brought news of another large bank failure? Banks still need to confront holes in their commercial real estate portfolios, but the worst for the financials may be behind us. The trick going forward for all our purchases (as it always has been) will be to identify excellent companies that temporarily witness a price decline.

In some ways the 2Q vindicated our investment process. Many of our selections that had been unfairly punished in this debacle roared back. Three of our closed end bond funds which invest in pools of preferred stocks, REITs, and convertible bonds posted gains of +50% or more. General Cable, provider of copper, aluminum, and fiber optic wire and cable products worldwide, was up +90% in the Q. The stock had fallen dramatically on fears that the company would have to take substantial write-downs on its copper inventory. With the price of copper moving back to more normalized levels, write-down concerns abated. International Game Technology was up +73%, and Watsco posted a +45% gain.

During the Q we bought shares of Eaton, the electrical and hydraulic power management company. When it looked like the world would never grow again, the stock became attractive and was yielding 5%. We added to our positions in Pharma Product Development, a third party clinical test provider. The stock traded down on news that the backlog was less robust than analysts' projections. Given the overwhelming need drug companies have to reinvigorate their pipelines, drug testing will be a longer term growth industry.

Gold Leaf is an independent Registered Investment Advisor that buys stocks in cash positive companies with sustainable competitive advantages. As an independent firm, Gold Leaf provides objective investment management. Our goal is to protect client assets on the downside while participating in most of the market's upside.