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All Systems Go!

3Q 2009

In July of 1969, the world watched in amazement as Apollo 11 delivered Neil Armstrong and Buzz Aldrin to the moon’s rocky surface. The achievement of something once thought so unattainable is what makes “one small step for man, one giant leap for mankind” such a memorable quote. Roughly forty years later, it’s with similar wonder that we’ve witnessed a tremendous rally in global equities. From the seemingly hopeless depths of economic crisis, the S&P 500 has rallied 58.2% from the bottom and posted the steepest back-to-back quarterly gains in over three decades.

Given the substantial improvements that have taken place, we thought it might be helpful to address some of the key issues that remain front-and-center. In the following segments, we answer several prominent questions using both facts and our humble opinions where appropriate.

  1.  Is the recession really over? What will the recovery look like? The Great Depression II scenario that seemed relevant in early March has been averted. Although unemployment and consumer spending remain concerning, a decisive upturn has been observed within the Conference Board’s Leading Economic Index series, and most economists believe at least modest growth is upon us. The debate continues, however, over whether we’ll experience a rapid “V-shaped” recovery, a double-dip “W” type environment, or an “L-shaped” scenario of positive, but relatively subpar, growth from a lower base. With each historical case being somewhat unique, only time will tell how the next portion of the cycle plays out.
  2. Is rapid inflation a substantial risk? From a purely economic viewpoint of supply and demand, inflation does not appear to be an immediate risk. With more than 15 million Americans currently unemployed, and manufacturing capacity utilization at generational lows, there is considerable slack in the system. The quarter’s decline in 10-year Treasury yields to just 3.3% is another signal of price stability. That said, the government is borrowing at an unsustainable rate, which creates longerterm concern about the level of interest rates and the value of the US dollar relative to other currencies. To prepare for potential future inflation, we’ve increased our focus on the use of both Treasury Inflation Protected Securities (TIPS) and a Managed Futures strategy within client portfolios.
  3. Will the equity rally continue from here? From a market perspective, a healthy dose of anxiety can prove useful as it prevents greed from taking control. This is especially true as investors try to “earn back” what they lost from the peak levels of 2007. Although it would not be surprising to see a near-term correction of some magnitude, we feel that longer-term there should be substantial buying support from the $3.5 trillion of cash that currently remains idle in money market funds yielding close to 0%. This backstop, combined with reasonable valuations, improving corporate earnings, and a recovering economy provide hope that the cyclical bull market can continue.

We thank you for the continued opportunity to work together – and would remind you that we’re always available should you have additional questions or wish to discuss anything related to your portfolio or financial life in general.

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