Mid-September 2009

September 21, 2009

It has been over a month since we last wrote. Most of the news has been good since we last communicated.

The markets have continued to edge higher – as of August 31, stocks (the S&P 500) enjoyed 6 straight months of positive returns. There has been a tremendous 50%+ rally off the March lows, but the market is still more than 30% below the highs of 2007. More people are beginning to believe this will really be a “V” shaped recovery and we hope “they” are right.

• Recent economic data appears to confirm a transition from recession to recovery. The GDP for the 3^rd quarter is likely to be positive.
• There is still an enormous amount of cash on the sidelines. Money market funds still total almost $3.5 trillion. This is equal to about 34% of the stock market’s total capitalization (value).
• Interest rates remain low and the Fed has indicated that it will keep them low for some time.
• More than 72% of the S&P 500 companies beat the average analyst estimates for 2^nd quarter earnings, the most since Bloomberg began tracking the data in 1993.
• The index of Leading Economic Indicators has risen every month since April.
• Europe’s economy is looking better.
• President Obama decided to reappoint Chairman Bernanke to another term as Fed chief.
• Consumer confidence and new home sales are up.
• “Cash for clunkers” was a big success.

• Rising interest rate risks in the future
• A weak U.S. dollar
• Health Care Reform and its impact on the economy
• Massive government debt
• Tax increases likely in 2010
• Commercial real estate challenges
• Swine flu (H1N1) worries
• Continued high unemployment
• Scarcity of consumer spending
• Problem banks have surpassed 400

After reading through the above PROS & CONS, it is easy to see why a case can be made for a further market rise, or a serious correction. At some point a correction is inevitable. Let’s see what we’ve learned from the last two years:

1. After every market decline in history, the stock markets have “ALWAYS” come back and often very dramatically.
   
2. During each decline, no one could predict whether the next 20% move would be down or up, but the next 100% move was always up. In other words, the market has never dropped 100%, but it can always rise 100%
   
3. We know that people who panicked and sold actually locked in losses. The others were temporarily down in value.
   
4. We know the media can create both fear and panic. The reality is market volatility is normal and should be expected when owning stocks.

Today the world feels like a better place than it did a year ago. Let’s enjoy this recovery cycle. Cyclical Bull markets do occur within the context of longer-term bear markets. Many problems remain and the old difficult buy and hold strategies won’t work in this environment. That is why we have met or talked to all of you over the last year and repositioned or tweaked your portfolios.

A rising market has always been a precursor to a recovering economy. It could run for a little longer, but don’t be surprised when the correction comes. There is still a case to be made for another 5% to 10% on the upside. However, when the market pauses, we believe it could be range bound for some time, i.e., a little up then a little down, and so on, and so on.

We will continue to look for investment programs and opportunities for our clients. As the clouds break and the sun comes out for our economy, let’s continue to remember our blessings.

As always, please call us with any questions or if you would like to set up a meeting.

Thanks for your continued loyalty.

Sincerely,