Valuation Letter to Clients April 2010
The current economic situation in the U. S. indicates there will be no inflation as there are excess resources in just about every category except jobs. Because jobs are so hard to come by, we are seeing a very slow economic recovery. It’s all about jobs.
The public is now correcting their over-indebtedness built up the past several decades. The U. S. is a consumption economy and as the consumer deleverages and consumes less, employment will remain weak. The current recovery remains slow because corporations won’t start hiring until their business picks up and there is a need to hire. Much of the current economic recovery is artificially generated by U. S. government spending and no one knows how temporary the recovery might be. Once job growth starts to pick up consumption grows and we begin the cycle, but we should not use past cyclical experiences to project when a stronger economic recovery will occur.
Never has there been such a wide range of opinions regarding the future. The market hates uncertainty. Yet as stocks have moved appreciably higher during the last year, uncertainty abounds. There is uncertainty regarding tax rates, government spending, healthcare, the economy and later in the year, the mid-term elections. While these uncertainties may create risks in the markets, they may create opportunities as well. On a short-term basis stocks, in general, are overvalued and overbought with over 90% of the S & P 500 stocks above their 50-day moving average. The stock market’s function is to discount the future and it is no wonder the market has barely budged over the past several months after such an incredible rise in 2009. Our opinion has not changed. We will be patient and continue to reduce portfolio risk while focusing on capital preservation, reliable dividend growth and dividend yield. Our clients are long those securities we expect to generate long-term wealth.
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