Week 39 Performance.....Outperformance in Q3 despite the Noise

Although Q3 finished on a down note this week, the overall quarter was an exceptionally strong one for the equity markets.  All four major stock indices finished up between 6.6% and 9.4% with the NASDAQ at the high end and the DJIA at the low end.  However it was the DWCM Fund that finished higher than any of those indices.

The DWCM Fund was up double digits, returning 10.3% for the quarter.  For the year the Fund is up 27.5% almost doubling the performance of the DJIA, S&P 500, and the Russell 2000.

What were the key drivers that led to this performance?  We hit on all but one of our strategies that we have been discussing throughout the year which include the following:

1. Agriculture companies, feeding a growing and diverse global population.  Here companies or farmers are trying to get more output with the same amount of acreage.  The severe drought was also a driving force behind some of the price movement up.
2. Dividend paying companies, but not just any dividend paying company.  Those that have a strong balance sheet with little to no debt and produce extreme amounts of cash did the best.  Here we diversified ourselves away from just telecoms and into health care, real estate, and energy
3. The Best Technology companies,  Apple and Google.  These two companies are the best at what they do and both turned in phenomenal quarters.  It's no surprise that these companies are the largest two holdings within the DWCM Fund.

What did we miss on this quarter?  We initially started our short position in a group of 6 home builders in the beginning of July.  Our belief was that with a weak economic recovery that was not producing enough growth in both jobs and income, that people were not going to be able to afford new homes.  We also took into consideration what is know as the "shadow inventory" issue where banks are sitting on an undisclosed amount of foreclosed houses because they are not ready to take the losses yet.  From a technical analysis perspective these stocks had already had such a huge run up (in some cases near 100%) that a pull back was likely in the cards. Well no such pullback has occurred and the home builders have produced decent returns which have made their stock prices climb even higher.

So where do we go from here?  The markets were back to themselves a little bit this week after the Fed hangover had begun to wear off.  The focus this week has turned to the European debt crisis and to a certain degree, more instability within the Middle East region.

As it stands today, President Obama has a slim but growing lead in the US Presidential election.  Everyone is putting a lot of emphasis on the upcoming debate this week and unless Romney wins this debate convincingly, it could be lights out for the Republican party.  However with that said, anything can happen in which case additionally volatility could seep back into the markets.

With plenty of uncertainty abound and another earnings season about ready to rain down upon us, what investment strategies will weather these potential storms?  We see plan to implement a strategy of, if it isn't broke don't fix it.  If we see a worsening of conditions in any of the potential issues which could bring equity prices down then we will act.  However, the DWCM Fund is already positioned on the defensive side of the ball with just over 40% in cash and the majority of our positions paying some form of dividend.

We have stated for the past several months that we would be comfortable holding up to 50% of the portfolio in cash if events warranted such action.  However we like the current position of the portfolio and are researching new investment opportunities on a constant basis.

The Week Ahead
There seems to be this constant feeling of trepidation during the first week of every month leading up to the jobs report.  The market seems to hang on every nugget of information that comes from the job report the first Friday of each new month.

Another closely watched data point will be auto sales.  Remember this could be a good indicator of how well the consumer is doing and feeling when it come to the state of the economy.  As opposed to a survey where consumers voice their opinion, here they really put their money where their opinion is.

• Mon - PMI Manufacturing Index, ISM Mfg Index, Construction Spending
• Tue - Motor Vehicle Sales
• Wed - ADP Employment Report, ISM Non-Mfg Index
• Thu - Challenger Job-Cut Report, Jobless Claims, FOMC Minutes
• Fri - Employment Situation, Consumer Credit

DreamWorks Capital Management

If you are currently trying to develop your own investment plan or are seeking the help of a professional investment advisor we urge you to give us the opportunity to show you what DWCM can do for you.  No matter what stage in life you are currently at, DWCM can help you plan for your ever changing needs.

DWCM can you help you with any of the steps in your wealth management journey including;

• Addressing emergency fund needs and requirements
• Developing a retirement plan
• Sending a child to college
• Looking at various investment options
• Determining how to involve philanthropic passions as apart of your planning process

With our "SMART Principles", we can help you develop your unique goals and create a focused customized plan to achieve your financial and lifestyle goals.

Contact us at pfenner@dwcmllc.com.