The market surge continued this month, though perhaps sanity is beginning to finally come back to the table. For the first time during this huge rally, quality seemed to matter a bit. The Russell 2000 (an index of 2000 small companies) has fallen to its 90 day trading average while the indexes of larger companies continue to trade well above their average. We see this as a trend that is likely to continue for quite a while. We have no idea whether this market is at a top right now, but we do know that the risks are growing that we could see a correction at any time. When the correction comes, do you want your portfolio focused on quality companies selling at average prices or low quality companies with no current earnings? To us, that is one of the easiest questions to answer that we have seen. The strategy, oft times referred to by Jeremy Grantham, is known simply as “survive to fight another day”. If you own good quality companies with earnings and dividends, they will still be around in a couple years even if we hit another large market slide. We can’t say that is true about owning a small company with no earnings in this economic environment.

On the flip side, we also expect the higher quality stocks to outperform should this market continue to escalate. These companies have good earnings, fair pricing, cash on hand, etc. Their future is bright, they have to wear shades! On the flip side, we continue to have a negative outlook for the Russell 2000 stocks.

In currency, we think the dollar may have a short rally in coming months, followed by a return to weakening against emerging market currencies. While we hope to participate in this area, we are not rushing into it with guns a blazing as we think the dollar may rally for a bit first.

Lastly, do we think the economy is fixed or sinking? That seems to be the topic that everyone is weighing in on. Our belief is that it was not as bad as most thought last November and isn’t as good as many think this November. We think things are getting worse more slowly and that the turnaround will be slow and muted from here. That seems to us to denote a period of slow growth and small returns, not the continuation of a huge bull market that   will make us all rich.