October 2009

Second Phase

The S&P 500 succumbs to its first loss since February with a loss of 1.86% for the month of October, and now stands at a positive 18.67% for the year; our results are currently posted on our performance page. With stocks rocketing from the very oversold conditions of eight months ago, fundamentals are now in relative balance with the market, and it will take more than multiple expansion to propel the market higher. Here is an overview as to what I see going forward:

• US economy has pulled out of recession but don't expect a vigorous revival; better growth will be seen outside the fifty states.
• Treasuries should remain range bound as the Fed stays on hold through 2010; corporate bonds likely to outperform as spreads continue to narrow with the recovering economy.
• Commodities and gold remain favored asset class as inflation will eventually flare in this debt ridden economy. If we go through a Japan style decade long deflationary spiral (perish the thought and very unlikely), gold should still remain a favored investment as something approaching Armageddon might not be far behind.
• It is probable that we are entering the second phase of this cyclical bull market (e.g. 2004-2008) with gains less dynamic and more volatile; getting the macro right will be very important going forward.

We have performed well in second phase bull markets where all boats don't rise with the tide; I am confident that we have the right formula to continue our superior performance with controlled volatility.

-Joe