"The Road Rarely Traveled" by WCM 04/19/09 |
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Seeing green is so much better than red. Since the March 9th lows, we have enjoyed a 25% up move in the stock market. With all the uncertainty and unknowns still plaguing the economy, I can’t help but think back to the words of that famous philosopher, Kermit the Frog, who said, “It’s not easy being green.” Unfortunately, some cold water has to be spilled on this rally. The head of the New York Stock Exchange has contributed the recent rally to short-term traders. He said he has yet to see “real money” come back into the market. We think the markets were way oversold, and we do believe that some fear has been removed. The subsiding fear of bank nationalization is a perfect example. This, and a few signs the economy is stabilizing, has certainly contributed to the recent upturn. The big question is what does the future hold?
The biggest factor that holds the answer to the above question is, what impact all of the Government Spending/Stimulus will have short-term, as well as long-term. The amount of spending from the Federal Reserve, Treasury and FDIC comes to about 12 trillion dollars. That is 90% of GDP ( So what will be the effect of this scenario? Well, I learned a long time ago not to try and guess the future. I’ve told people during my career, if anyone tells you “this time is different,” run from them. But, even Warren Buffett admits, this time is different. We have hardly ever experienced what we are seeing in the credit markets, and we certainly haven’t seen Government action to this extent before. It would not be surprising to see the equity markets hold or continue to provide more green than red over the next six to eighteen months due to all the spending/stimulus being dropped on the economy. The stumbling block would be if it becomes apparent that all this “money dropping” is not working. We have already seen the Treasury extend the application deadline for the PPIP (Public Private Investment Program) because of a lack of interest. There also is the potential that the problems we are currently experiencing in personal mortgages will spread to the commercial real estate sector and possibly into credit cards and anywhere else where credit and leverage are used. Saying that, we also fear a bigger problem lies ahead when we have to pay for all the “fixes” that the government is implementing. This will lead to a wall of inflation at some point. Preparing your portfolio for this future is crucial. We have been, and will continue to recommend portfolios have an overriding theme, yield, yield, yield. Allocation to a broad array of income-producing securities is very important. With credit spreads at historically wide levels, corporate bonds and even high-yield securities remain very attractive. This allocation, along with commodities and interest rate hedging, will provide a good defense to the upcoming inflation. Even though you might be early to the party, you are getting paid while you’re waiting. The equity markets continue to be a little more difficult to read. The key here is to make sure the areas that are dedicated to growth in your portfolio are diversified and weighted proportionately to your risk tolerance. Remember this…retirement planning and cash flow analysis should be the driver to proper investment allocation and risk management, not the daily, weekly or monthly stock market movements. |
