Foxhall Global Outlooks

As an investment strategy, FOXHALL CAPITAL follows long-term trends in the stock market. During long-term bull markets, we try to remain fully invested in the stock market. During long-term bear markets, like 2000 to 2002 and 2008 to 2009, we can move our portfolios up to 100% in cash and U.S. treasury bonds in an attempt to preserve our clients’ capital.

But there are usually shorter cycles within long-term bull markets that the successful investor needs to recognize. For instance, in my opinion, most economic growth and stock market growth takes place between late October and late April of each year.

During the summer months and early fall from May to October, the economy usually slows as the weather gets warmer, people take their vacations and go to baseball games. Don’t ask me why this happens, but this has been a prominent trend for the past 60 years.

WE ARE IN THE SUMMER DOLDRUMS RIGHT NOW!

One of the characteristics of the “summer doldrums” is that the stock market tends to go up and down during this period in a side-ways pattern. That is what we are seeing right now.

Over the past few weeks we have seen corrections in the stock market, and corrections in commodities.

However, commodities are still the best performing asset class for the year. As I mentioned in my last GLOBAL OUTLOOK, I believed this was just a short-term correction. That is what it turned out to be. Oil is now back over $100 a barrel, gold has come back and is just 3% below its most recent high and even silver is back to the price it traded at two months ago in late April.

The government has issued the usual weak summer economic data and I expect the economy to grow at a very mediocre pace throughout the summer, just as it did last summer.

With regard to the stock market, we should see both ups and downs all summer long, but I still believe the stock market will grow at least in single digits over the next 4 or 5 months. I then believe we will see strong growth the last 3 months of the year. I will write about this in future GLOBAL OUTLOOKS.

HERE IS A LIST OF EVENTS THAT COULD CAUSE VOLATILITY IN THE STOCK MARKET.

Just as we have experienced for the past few weeks, we should continue to see the stock market go up a few percent a day and then suddenly drop a few percent the next day. That is the typical pattern of the “summer doldrums.”

It seems almost every time China raises interest rates to try to slow their economic growth the stock market goes down for a few days and then recovers. It appears every time Greece looks like it will default again on its debt the market goes down and when the European Central Bank comes up with a new plan, the stock market goes up again.

This is the pattern we should see all summer. Here are some of the other events that could cause the stock market to gyrate over the coming months:

EUROPEAN DEBT CRISIS: It now looks like Spain, Portugal and possibly Italy may need some sort of bailout from the European Central Bank and the IMF.

THE END OF QE2: QE2 is the name given to the Federal Reserve’s latest stimulus program. It will end on June 30th and many investors will be concerned with the effect this will have on the stock market. This will probably cause the stock market some turmoil around the end of June. I believe by August everyone will see this as a non-event.

DEBT CEILING DEBATE: As the republicans and democrats “play chicken” up to the last minute before they have to vote to raise the U.S. debt ceiling, this artificial political drama could cause great anxiety in the stock market as the world worries about the U.S. government defaulting and causing a major global economic crisis. As Winston Churchill once said, “the Americans will always do the right thing, after they have tried everything else.” As usual, there will be a last minute “face-saving” deal and our brave politicians will declare victory by raising the debt ceiling once more.

GYRATING U.S. DOLLAR: The U.S. dollar could gyrate all summer long. During every European debt crisis the dollar could go up against the Euro. During the debt ceiling debate the dollar could go down as global investors worry about and U.S. default. While the long-term trend in the U.S. dollar is down because of our printing money and deficit spending, short-term economic events should have it swinging both ways over the next few months.

MIDDLE EAST UNREST: The continuing unrest in the Middle East and the problems in Afghanistan and Pakistan should continue to inject uncertainty in global stock markets.

WHAT STRATEGY DOES FOXHALL RECOMMEND?

As I have stated before, the successful investor stays focused on long-term trends and tries to ignore the “noise” of short-term transient gyrations in the stock market.

Here is what the long-term trends tell us:

All of the long-term economic trends are positive and solidly in place. Yes, the U.S. economic recovery is mediocre, but the U.S. economy is still growing and there is almost no chance, short of some unforeseen economic disaster, that could cause the U.S. to slip back into a double-dip recession.

Asian economies are slowing and this is very good news. This means that Asian Central Bank policies are working. Asian Central Banks have been raising interest rates for over a year in an effort to slow Asia's unsustainable growth rates to a more sustainable 6% to 9% growth rate. Their policies are working and many Central Banks are signaling that they will stop raising rates over the coming months. When this happens, I believe Asian and emerging stock markets will take off.

Commodities are still in a 10-year to 15-year long-term bull market. Even if underlying economies like China are trying to reduce their growth rate from 12% to 9%, that doesn’t necessarily signal a slow down in their buying commodities. The vast majority of commodity buying is by Asian governments as they are building long-term infrastructure projects like super highways, power plants, airports and new electrical grids. These projects also provide jobs, so they are unlikely to slow even if the overall local private sector economy is slowing. Many Asian governments have large surpluses to pay for these massive infrastructure projects. I believe commodities will continue to be in demand and continue to rise over the long-term.

HOW DO YOU TRY AND PROTECT AGAINST UNFORESEEN DISASTERS?

Unfortunately, unforeseen disasters are becoming commonplace.

I would have thought anyone was crazy if they had told me five months ago:

That the Egyptian and Tunisian governments would be overthrown by students.

That the U.S. would be invading another Middle Eastern country like Libya.

That Japan would have an historic earthquake, tsunami and nuclear power plant melt down.

That the U.S. Navy Seals would find and kill Osama Bin Laden.

That Donald Trump and Sarah Palin would lead republican presidential polls and be taken seriously as possible presidential candidates.

This has all happened in the last five months!

WE LIVE IN A FRAGILE AND DANGEROUS WORLD

The economist, Nassim Taleb has written a book about what he calls “Black Swan Events.” These are highly improbable events that seem to be happening with greater and greater frequency.

We now live in a global economy where things happen in other parts of the world we can’t control and they end up affecting the U.S. stock market.

This is a new economic era—a dangerous era and a fragile world.

We believe that one of the effective ways to navigate this brave new world is with the FOXHALL INVESTMENT PROCESS that provides a bull market strategy that keeps investors largely invested during long-term bull markets and a bear market strategy that quickly moves investors out of stocks and into cash, treasury bonds or other investments in an attempt to protect a clients principal once a long-term down trending market is identified.

Second, we believe that every portfolio should have a significant exposure to commodity and commodity producers like oil, gold and other precious metals, to try and protect clients against unforeseen “Black Swan” disasters and the purchasing power of client ac-counts against the ravages of inflation.

Based on Foxhall’s proprietary inflation research, we recently increased the commodities/hard asset exposure from 10% to 16% in the strategies that include diversified equity.

For investors that do not have exposure to a broad range of commodities, the Foxhall Global Commodities & Hard Assets Strategy is a convenient way to add that exposure. All Foxhall investment options include the "dual strategy‟ component that is designed to avoid prolonged exposure to long term market down trends.

We believe this change should help our clients navigate the “summer doldrums” with a higher margin of safety in an uncertain world.

While I predict an up and down summer, I still believe we will end the year with positive stock market gains.

Patience!

—Paul Dietrich

dietrich@foxhallcapital.com

Disclosures: The opinions and portfolio information provided in the Foxhall Global Outlook are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security. Client accounts may differ from model allocations due to many reasons. All investment strategies offer the potential for loss as well as gain. Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing. Past performance is not a guarantee of future performance.

Foxhall Capital Management, Inc. is a registered investment adviser with the U.S. Securities and Ex-change Commission (SEC) under the Investment Advisers Act of 1940. The firm is defined as the Foxhall Capital Global ETF, 401(k) and Stock Series divisions, which manage a variety of ETF, 401(k) and Stock strategies in bundled fee and non-bundled fee ac-counts for primarily U.S. clients. The firm was redefined as of 12/1/08 due to the creation of the 401(k) Series division. A complete list and description of all firm composites and their com-pliant presentations are available upon request.

Foxhall Capital Management, Inc. claims compliance with the Global Investment Performance Standards (GIPS®). Foxhall Capital Management has been GIPS verified for the periods 12/31/99 – 12/31/08 by Beacon Verification Services. The ETF Series composites have received a performance examination for the period since inception through December 31, 2008. A copy of the verification report is available upon request.