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QUARTERLY
MARKET UPDATE as of January 2010
During the Fourth Quarter
financial markets, both domestic and international, continued to rally. The Standard & Poor’s 500
Stock Index posted a 6.0% total return, and is now up a shocking 65% from
the low set on March 9th.
However, this index is still down nearly 30% from its high set in
October, 2007. International
stocks have rebounded even more during the year. Bond investors, while looking at more
subdued returns, have never-the-less enjoyed positive results as well.
Many pundits argue that the
worst is behind us and the economic tides have turned. Much evidence is available to support
this claim. Third Quarter GDP
growth turned positive for the first time in well over a year. Consensus views are that this trend
continued in the Fourth Quarter and will actually get stronger as we
enter 2010. Earnings growth has
rebounded and for many companies is expected to accelerate as the global
economy finds its footings.
Corporate balance sheets
have been strengthened with record levels of cash. This cash buildup has occurred as
companies have chosen to take advantage of record low interest rates and
have been reluctant to spend anything on new plant and equipment in these
uncertain times. This cash could
easily be used to launch a new phase of sustained economic growth in our
global economy as demand picks up and productivity peeks.
A rising tide lifted all
market sectors in 2009, with the largest gains in economically sensitive
sectors; otherwise known as “cyclicals.” Our question for 2010 is whether
economic growth will be strong enough for cyclicals to deliver enough
earnings growth to justify the past year’s share price surge. While we too expect positive GDP growth
going forward, we believe that headwinds will be strong, causing less
than expected growth.
The real estate market
remains weak, despite signs of stability.
Although large price declines have given way to slight increases
in many markets, we expect to see a resurgence of foreclosures by mid
year. This is when many of the “option-arm” mortgages written
in the past few years will reset at higher interest rates. We do not expect the consumer to add to
GDP growth until real estate has clearly turned the corner. In addition to the real estate drag,
persistently high unemployment will keep a brake on consumer
spending. With the consumer
representing over two-thirds of GDP it is hard to vision robust growth in
the near term.
Many of the Federal government
stimulus programs set in place in the last 15 months have had a positive
impact on rebuilding a distressed economy. However, the magnitude of
spending/stimulus (approximately $40,000 for every man, woman and child
in the U.S.)
presents a long term challenge as authorities are faced with the task of
defining and implementing an effective exit strategy. Absent a solid strategy, we could be
faced with higher inflation, a weak currency, and below potential economic
growth. Regardless of the details,
we expect to see rising interest rates in the next few years. In fact, the yield curve has steepened
significantly as longer term rates have already risen. As a result, we plan to continue our
focus on short to intermediate term maturities for fixed income and
balanced portfolios.
This year’s rally not
withstanding, the past 10 years have been a challenge for most equity investors. The decade presented two recessions and
two of the worst bear markets in history.
Many investment firms and brokerage houses no longer exist or have
been forced to merge. We are
especially thankful to you and all of our clients at Eagle Harbor Asset
Management as we recently celebrated our 10 year anniversary.
We believe that focusing on
strong fundamentals has helped in weathering the many storms of the past
decade. We will continue to focus
on quality in the investment management process. Quality growth oriented companies that
offer solid balance sheets, above average returns on shareholders equity,
strong cash flow generation, and attractive valuation levels will
continue to provide, in our opinion, strong relative returns as we enter
a new decade.
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