New Treasury Secretary Timothy Geithner delivered a speech yesterday outlining the new administration’s bailout plan. Unfortunately, the address lacked detail and presented little significant change from earlier plans. Moreover, it was short on inspiring any confidence or faith that the plan will be successful which caused financial markets to respond negatively. Leadership is measured by effective, detailed planning and communication that builds confidence. On these points, it looks like our new Treasury Secretary needs to take more time preparing for these speeches and perhaps a Tony Robbins class on communication.

Though yesterday’s stock market pullback can be justified by Geithner’s less than stellar speech, we would suggest that this short term decline was more likely an overdue correction. In late November, stock markets reached their lowest point, then quickly rebounded 20% during December. So far this year, most indexes have declined by about 7%. In fact, for the past 4 months, global stock markets have been exhibiting this volatile back and forth action, or what many call a “trading range”. This is an important character change and one which we want to pay close attention, for this type of behavior is very symptomatic of stock market bottoms. Usually this type of back and forth trading range will exist for 3-6 months creating a foundation for a new bull market in stocks. You may be asking yourself - “a new bull market in stocks, when the economy is so bad?” - has my investment manager gone bonkers?!

Stock market recoveries usually begin in the middle of a recession – the period when the economy is at its worst. This recession began in the fourth quarter of 2007 and our research suggests that it may last until the first quarter of 2010. That would put us a little more than halfway through the current recession – a time frame that coincides with the timing of a stock market recovery. Moreover, there is other increasing evidence of a potential recovery which includes: a historically high $4 trillion in money market balances, super low price to earnings ratios, and the fact that stock indexes are now below their 50 year long-term trend – a point from which stocks have recovered in the past.

Though we are hopeful about the possibility that we have entered the global stock market bottoming phase, we are not going to be Pollyannaish in our approach. Therefore, we continue to maintain higher than normal bond and money market balances and we are re-entering the stock market in careful phases – not all at once. In addition, we are continuing our use of active stop loss orders. In the event that our perception of a stock market bottom is incorrect and stock markets go significantly lower, some of your portfolio, including our recent purchases, may be sold to protect your principal.

It has been a difficult 18 months for the global economy and financial markets. However, at some point stock prices should discount all of the bad news. We are hopeful, yet skeptical, that we are beginning to enter that phase and that better days are ahead for markets and your investment portfolio.

We hope that this message finds you well. If you have any questions or would like to get together, please let us know.

Sincerely,

James E. Demmert
Managing Partner