INVESTMENT UPDATE
MARCH, 2009

Confidence is fragile.  In these difficult times, there is a complete lack of confidence in the pillars of our nation’s prosperity.  In particular, investors are not confident that monetary and fiscal policy initiatives will achieve the goals of stability and growth.  Since President Obama’s inauguration, The American Recovery and Reinvestment Act of 2009 became law, the Treasury Department announced several programs to help banks, homeowners and securitized lenders as part of the Financial Stability Plan and the Administration proposed the FY 2010 federal budget.  Despite these efforts to implement fiscal solutions, the financial markets remain unconvinced.  The negative and self-reinforcing dynamics of the current downturn are still in effect and investors are wondering how to reverse the spiral.   As a result of these concerns, stock markets around the world continue to decline.  Major stock indices have declined approximately 20% to 25% year-to-date and are at 13 year lows.

In general, investors are troubled by the perception that our government’s initiatives do not provide more effective and immediate assistance.   The impact of the stimulus package targets the future more than the present while the economy needs an immediate powerful boost. In addition, the anticipation of “pro-business” tax cuts was dashed in favor of traditional government spending and transfer payments.  The Treasury’s plans provide a solid blueprint, but investors want to deal more expeditiously with the nation’s troubled assets and banks.  Investors know the problems resulting in Japan’s “Lost Decade” and want to purge the banking system of troubled debts and assets as quickly as possible.  It is difficult to begin a new process of credit growth without the recognition of yesterday’s mistakes.  Furthermore, until  the banking system’s problems are more fully disclosed, investors are reluctant to move forward with new commitments.

Despite investor frustration with new stock market lows, there are modest signs of improvement in the financial markets.   First, access to credit is improving for consumers and businesses.  This improvement is visible in tighter spreads, new debt issuances and greater mortgage application activity.   Credit availability is not robust, but is better than the “freeze” in October 2008.  Second, systemic risk associated with bank failures has been greatly reduced.  Previously, the entangled nature of financial contracts and counter-party risk made possible a “domino effect” series of failures. These risks have been minimized despite persistent problems at large firms such as AIG, Citigroup, the Royal Bank of Scotland and UBS.  Third, lower energy and commodity prices are a powerful stimulant that is helping consumers and businesses during this period of economic stress.

Restoring confidence will take time.  Major indicators, such as GDP, corporate profits and unemployment, continue to deteriorate in early 2009 with the expectation of improvement in 2010.  Improving market psychology will be influenced by evidence that the downturn is stabilizing.  We have not yet crossed that threshold, but may be close.  We are confident that patiently waiting for fundamentals to improve is the right course of action today.  Outlasting this market panic requires perseverance and fortitude and a belief that economic and business growth will be restored.  We believe they will and remain confident in the future prospects of the U.S. economy and stock market despite the current chorus of doom and gloom.  At this point, many stocks appear attractively priced for the intermediate and the longer term.