March 31, 2010

It has been just over a year since US markets hit bottom. On March 9th, 2009, the S&P 500 traded below 670. Generally, investors had lost confidence in the market, and many never wanted to hear the words “stock market” again. Since that day, US equity markets have risen nearly 70%. As a result, some investors may look at their portfolios with some level of disappointment, as the vast majority of investors underperformed the S&P for that period of time. However, this only tells part of the story. In virtually all cases, the approach utilized by the Gary Goldberg Financial Services Investment Committee, has afforded our clients comfort and allowed their portfolios to beat the markets since their highs set in 2007. And as a result, we are still ahead of the broader markets on a 3 and 5-year rolling basis. Moreover, when tracking portfolio returns on a quarterly basis, we have “kept up with” markets in the last 6 months. Thus, any relative underperformance was caused in a very compressed time frame, when few dared to be fully invested, and even with the benefit of hind sight, most are glad they were not.

So what now?

Credit Markets will lead the way. Although liquidity and loan facilitation have improved since the "great freeze", the environment continues to be difficult - in particular for small business owners. Moreover, there continues to be grave concern over sovereign debt. The problems in Greece are likely to be the "tip of the iceberg". Deficits and debt levels in Spain, Portugal and Italy will restrict the economic recovery in Europe. Furthermore, as China restricts loan origination in an effort to slow down its economic expansion and avoid a rapid rise in home prices, liquidity and availability of credit in south-east Asia may slow as well. This is likely to lead to increased market volatility over the summer months. Simultaneously, Central Bankers around the world are beginning to experiment with various mechanisms to reduce and withdraw some of the liquidity they have added over the past two years. In a sign that the world's economies are improving and the recovery is beginning to take hold, Australia has raised interest rates, China has tightened reserve requirements and the US has shortened and raised the Discount Rate it charges banks. Moreover, nominal interest rates that impact borrowers have remained and are likely to remain at historical lows. This should, in our view, continue to support the economic expansion. Later in the year, as liquidity improves and interest rates remain low, we believe business will begin to hire again, which should lead to a drop in the unemployment rate by years end. Although there is a lot of focus on the large deficits in the US and the vast sums of money being printed by the Treasury Department, we do not believe there is an eminent threat of inflation over the next 12 months. While we anticipate an increase in commodity price volatility, we believe the muted world-wide economic recovery will sufficiently suppress demand to mitigate actual inflation. In our view, signs of inflation will become visible in 18 to 24 months. As such we continue to be selective in our investments into World Protect Inflation Securities (WIPS) and select soft commodities or commodity producers.