Wednesday, April 1, 2009

First Quarter 2009 Recap

The general tone of those I talk to regularly is tending to a PTSD type mood. The collapse which occurred with blistering speed in the fourth quarter of last year settled into a volatile, but generally sideways market over the past few months. The emotional damage done in a catastrophic investment climate lingers. The greatest challenge now is coaxing clients out of their foxholes and back into the light. It is of paramount importance that investors remain aware that the investment market anticipates economic improvement by six to nine months. In other words by the time the all clear is sounded, some of the best opportunities will be past.

In the chart above we see a reasonable gain in long duration treasury bonds, a small gain in gold and in every other asset class very significant losses.

But if you look more closely at the most recent three months something else is found.

The US treasury bond in the first quarter gave back half of what it had gained in the fourth quarter when investors fled from all risk. The extreme reaction at the end of last year is obviously abating as investors begin to sell Treasuries in anticipation of other better alternative investments or an assessment of higher future interest rates.

The commodity index had a good quarter with a gain approaching 10%, the technology laden Nasdaq index contributed nearly 5 percent gains while the S&P 500 and foreign EAFE index fell. Real Estate continued to dissolve.

The common link in the results is the weakness of financially based sectors. The S&P 500 and EAFE index have significant banking components, while real estate is largely depending on credit availability.

March alone provided most of the quarter's gains with broad gains in all asset class as well as gain in bear dollar plays. Given the bad news that continues to be reported, GM likely bankruptcy, first time unemployment claims for the month over 700,000 and quarterly financial reports expected to be worse than the fourth quarter, the positive market action is encouraging. Returning to strategic allocations in the near term, while awaiting better guidance for tactical alpha producing positions is now recommended.

Given the positive market action of the Nasdaq we are over weighting the Nasdaq and technology. The lack of legacy costs found in the manufacturing sector, low debt and clean balance sheets make this area of the market makes me believe it will lead the market. Additionally, the increasing savings rate at the expense of consumer spending, contracted credit availability and the expectation of technology spending to enhance productivity and competitiveness favor the sector.

John Barnyak