APRIL 2009 NEWSLETTER

After testing new lows in early March of this year, we have witnessed five weeks of sensational  gains of over 20% in just 13 trading days across most of the major stock benchmark indices. There has also been positive discourse surrounding the potential for economic recovery as early as the end of this year. In this most recent bottoming of the market, we did not witness the dramatic volatility that marked the lows of the last two quarters in 2008.  

Two basic questions loom. Do we have enough economic stimulus to fully recover, and even then will the economy be able to sustain long-term growth moving forward?

I  believe the answer is ‘no’ to both questions. Tell me if you agree. Somewhere in the vicinity of $12.8 trillion dollars has been spent, invested, and guaranteed in the revival effort. To put this in perspective,  our entire annual national economic output is in the vicinity of $14.2 trillion. How much longer can you borrow at that pace from tax revenues that are declining as an economy declines? We are actually borrowing to buy our own debt! Eventually the snake that has swallowed its tail has nothing more to eat. 

So, what are we to do?

The plan is to be ready for potentially worse times further down the road, and to use a market rally wisely. To do this, we advise going to a large proportion of cash and short-term CDs within the next year or so. This will represent part of the effort to protect your portfolio from the potential devastation that would happen if the stock markets dropped by another 50%. The question is timing. The government economic stimulus is working. The credit markets are thawing. From January through March, our leading indicators showed dramatic upturns approximately 7 months out. Now that we are in April we are seeing this spike begin to flatten. This could indicate a resurgence in economic activity that may drive the stock market up. This may be the best point for a move to the stability of cash, CD’s and very short term high-quality bonds.

You can not make a portfolio last and grow for decades just sitting in cash. Can you imagine the inflation that may be in the offing as these loans to the government come due? How will they possibly pay them all back? There are technically two courses of action, however only one of them is permissible for a country with the stature of United States. One would be to simply default. Brazil and Russia come to mind as governments that chose this route in the past. The second solution is inflation. This is the most likely outcome for the U.S. With inflation will come rising interest rates. While normally perceived as a bad thing, rising rates will actually be our silver lining. If things do in fact come to pass in this manner, we can be patient and buy bonds when interest rates rise with inflation. It may take some time for this to occur as we would anticipate monitoring for long term treasuries to come up from the current 3% range and push upwards of 6%.

At these rates, a portfolio heavily weighted towards bonds will produce a good income. It will also potentially appreciate in value if the Federal Reserve turns around and lowers rates again in an attempt to re-stimulate the economy. Japan tried this approach and it did not work. However, in the process it made long-term bonds with high interest rates very valuable.

Nothing is ever set in stone. The future contains uncertainty. There may be a need to retain equity exposure to a degree, and there may not.  We will continue to actively manage your portfolio using the best resources and data we have available. Our priority is always ensuring that your most basic goals and objectives are met, and there are a variety of investment tools to help us do just that.

Let me close by saying we have confidence that the economy and stock markets here and around the world will continue to recover over the balance of 2009. We also have confidence that it may not last long-term. Therefore, we advise a course of principal protection.

From the desk of Trow Trowbridge:

Best Wishes from Dominion Wealth.