MAY 2009 NEWSLETTER

Spring has sprung in many ways. Most important to us is the resurgence of investment values since early March. You can peek at your statements again!

What should we expect in the future? I believe it will be a very tough slog back to any semblance of our former economic vitality, and probably nowhere near the peak values of 2007. There is just too much working against us, both here and globally. It will take a long time to get the unemployment rolls whittled down and the consumer back in the game. Even then a chastened and more mature consumer base may not drive the economy as in the past 25 years. The consumer has turned into a saver and is reducing debt at historic levels.

The indicators and research sources we follow have continued to point upward in May; some dramatically. For example, the current “cash on the sidelines” is approximately equal to the total value of the U.S. stock market. The last time this relationship occurred was 1982. The markets moved up 35% over the ensuing six months.  It is interesting to see the markets shrug off relatively bad news and hold or even move up. There is something in the wind and the markets are sniffing it.

The National Bureau of Economic Research is the most widely accepted source for historical reviews of when recessions officially begin and end. Recall that they did not announce the beginning of the current recession as December 2007 until December of 2008. The investment markets began their horrific slides in concert with the recession. History has shown that over the last four recessions, this Bureau has been late to call an end to a recession by an average of 15 months.** So when we hear Ben Bernanke and the Federal Reserve mention that it could be late 2010 until we see a GDP that is reflective of sustainable growth, we must temper this news with the knowledge that a recovery could come much earlier and may have already begun.

Our plan has been, and still is, to exit the equity markets as early as the end of 2009 if our indicators dictate. This would involve upwards of a 60% reduction in equity exposure, beginning with the more volatile sectors within your portfolio. In our opinion, the opportunity for long term growth is outweighed by the risk of lower stock prices for an extended period; as much as 15 years. I recommend preserving capital and hedging the risk of rising interest rates and falling stock prices. Please review the attached Portfolio Plan that we have for the next five years or so. I may have discussed this plan with you already. Please forgive the repetition but I believe that repetition is the mother of all skill.

The developments over next few months are very important for the U.S. and global economy. We will be monitoring them closely and make recommendations to keep you on track. 

We look forward to speaking with you soon.

Your Advisors at Dominion Wealth