January 2009

Just About Right

With threats of regulation (Volker rule) and populist jawboning against the financial institutions , the S&P 500 decided to take its first monthly break since the sixty-five percent ascent from the March lows, stumbling a modest 3.60% in January. Please see our results now posted on our Performance page. Whether or not this is the start of a more protracted correction (projected here to start sometime in the Spring) or just another blip remains to be seen, but from the research I read (BCA, Lowry, Barron's, WSJ etc.) equities should continue to trend higher, if for no other reason than lack of competition. Some fundamental and technical thoughts below:  

• With credit restrained, unemployment high, and consumers no longer able to use their home as an ATM machine, spending should remain slow, interest rates and inflation benign, and thus afford the Fed the luxury of keeping rates low despite the horrendous deficit spending.  

• The economy expanded by 5.7% in the fourth quarter, and although sixty percent of that was inventory accumulation, nevertheless, it is a sign that the economy is growing again. With hints of the employment picture improving along with capital expenditures and positive news on global trade (emerging markets are expected to grow 6.0 % this year and 6.3% in 2011) , the likelihood of a double dip recession would appear remote.  

• Commodities and basic materials have been correcting lately along with the strength in the dollar, and although the dollar may well continue to rise against the euro, it is doubtful that it will remain strong against emerging and commodity based currencies. This, along with the fact that the world economy is growing again, should bode well for this asset class that has treated us so well over the years.

• From a technical perspective, the market has been looking for an excuse to pause, but given that selling pressure has only recently begun to rise (everybody doesn't decide to sell at the same time) it is extremely unlikely that this is more than a technical correction. Selling pressure can rise for more than a year before a bull market ends, and in fact, it has retreated over the past couple of days.

In sum, the market appears to be priced just about right, and as I have said before, this will probably be a year when it is important to get the macro right. Although I have never been one to follow other pundits, this year's crack roundtable team in Barron's is aligned in many ways with our portfolios. From agricultural (Faber points out that wheat is at a two hundred year low (inflation adjusted), and that farmers are going to have to start fertilizing again) to Devon with its oil shale properties, to gold and emerging markets, there seemed to be a lot of buzz around our themes. As always, let's hope they're right.

-Joe