JUNE 2009 NEWSLETTER

The first two quarters of 2009 have been interesting to say the least. The market lows of 2008 were truly tested, and ultimately we found ourselves at a new and troubling “bottom.” Since then we have seen a 30% rebound in values and signs of confidence that economic recovery may be on the horizon. The Federal Reserve announced in their meeting this past week that they will continue with their $300 billion Treasury purchase plan as originally intended. The target for completion of this plan is mid-third quarter of this year. Since February when this plan began we have seen rates on the 10 year treasury move from 2.5% to approximately 3.7%, pushing the value of the bonds down in the process. This program, coupled with the Fed’s plan to purchase housing debt, is aimed at pumping cash into a struggling economy that is currently on pace to retract 5.5% in 2009 (annualized real GDP). We see these actions as largely inflationary, and remain of the opinion that rates will continue to rise gradually over the next few years.

Contrarian sources point to the rise in commodity prices as another sign of looming inflation. Perhaps you are noticing this each time you fill your car up at the pump. While few analysts are predicting the record high gas prices of last summer, you are no doubt noticing the extra cents per trip. Despite these inflationary pressures, the Federal Reserve Board elected to maintain the current fed funds rate at it’s current range of 0-.25%. The rationale largely seems to be that with such a weak economy we are more likely to witness short-term deflation, or drops in prices. Rising unemployment is seen as one sign that prices are likely to stay low, or be driven lower in the near future. It is difficult for businesses to make a profit in an environment where the cost for goods is lower, and so they look to trim costs by cutting production and laying off workers. If not monitored, it can become a vicious cycle of layoffs and price cutting.

So which is it then? Rising or falling prices? The Federal Reserve Board stated that they intend to maintain low rates for an extended period of time. Prior to this announcement, the futures market had already built in a rate hike into their year-end pricing. We do not doubt that the Fed is trying to assure people that rate hikes are not likely, we simply wonder if they will be able to follow through. At some point rates will have to increase. Inflation is the 800 lb gorilla. He may not be in the room just yet, but he’s certainly peering through the door.

In the meantime, the market rally from March through June seems to have been tempered slightly as we have sign a pullback over the past 8 days the represents a “cooling off” period. A 30% run-up in stocks over a 2 and a half month period was clearly a pace that was not sustainable for the long-term. We have taken this opportunity to begin to decrease volatility within the portfolio and intend to continue doing so over the remainder of 2009 as opportunities present themselves. It is imperative that we stay in communication regarding these developments, and our regular meetings continue to be the most effective means of conveying investment policy and gauging progress on your financial planning. We encourage you to contact us when you receive your quarterly reports to set a time for a review. We will endeavor to coordinate these with you in a timely fashion. Until next month…

From the Desk of Matt Brennan