Beyond the
Trading Desk
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As Fall sets in, we say goodbye to the "Summer that never was." While I am disappointed with what seemed like such a short and cool summer, Sandra and I did get out for some nice hikes. I'm happy to report that our two dogs, Simon, age 11 and Edy, age 10, held up quite well even on a 10-miler. Fall is the best time for hiking and I expect we will get out and get a few more miles behind us. I wish you all the best with your own Fall activities. Let's hope we get a mild Fall and Winter to help make up for the summer.
Our vacation this year took us to the central Adirondacks where we combined some camping with a stay on Fourth Lake in Inlet, NY. The weather was nearly perfect with only one rain-soaked night in a tent. Although the nights were cool, the days were spectacular. We bring the dogs with us, so it is a true family vacation. The best part is that I was able to finish two books during vacation. For me, pleasure reading is very limited normally due to all the work-related reading I do every day in the office.
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Last Quarter Round-Up
The third quarter of 2009 turned out to be nearly as bullish as the second quarter, with the S&P 500 gaining just under 15%. I have to say I am surprised at how far the markets have moved considering this marginal economy. Admittedly, I was tentative at the end of last quarter and was wrong. But that is the nature of the financial markets. The future expectations are discounted into today's prices, which is an extremely subjective game. The market's future expectations and discounting aren't always right, as one could point out from last August...just before the markets imploded, it was clear that the pricing had not discounted the coming financial crises. The equity strategy last quarter called for a reduction in stock exposure while adding to small cap positions. The fixed income strategy moved away from long bonds, increased cash and short bonds while holding positions in hi-yield and inflation protected bonds. Quarterly asset class results: Large cap +14.76%; Small cap +22.24%; Long bonds +4.32%; Short bonds +0.36%; Hi-yield +6.38% and Inflation Protected Bonds +1.22%.
Global Economic Outlook
With the S&P 500 up over 50% since the lows in March, it seems that risk-taking is back in full swing. Stocks continue to move higher, even in the face of substantial economic headwinds. Reasonable arguments can be made for both Bullish and Bearish expectations. I believe the most compelling question, as we progress thru the fourth quarter, will be Inflation vs. Deflation. Those two conditions require very different asset management approaches making the choice very important. Most analysts are busy talking about large Government spending, deficits and money printing. Many feel that inflation is inescapable. But year over year inflation is at -1.44% and while I understand that inflation may hit us, I think deflation is more likely in the near term. That is worrisome...because deflation is worse than inflation. My equity strategy for the quarter is to again reduce overall stock exposure favoring large cap over small and developed over emerging markets. For fixed income, I plan to increase cash and long treasuries while reducing exposure to hi-yield bonds.
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