Market Commentary

01/11/2009 --- Gradual Credit Market Improvement -- End-of-Year Asset Allocation Rebalancing

The credit markets continue their gradual improvement. In the past month the rate for short-term bank-to-bank loans has fallen 34% from 1.92% to 1.26%. Furthermore, the spread between these short-term rates and T-bills has fallen 37% to 1.20% over the past month. Ideally we'd like to see the spread eventually fall below 0.5%.

Recently there has been a lot of talk of a bubble in Treasuries. For a graphical view of the potential bubble, go here. Investors who strictly follow an asset allocation model with an end-of-year rebalancing will be automatically moving a portion of their funds out of overvalued treasuries and into other asset classes that have been beaten down, such as equities.

12/29/2008 --- Cash Levels Highest Since 1990 - Historically The Market Rises 24% in Six Months Following Peak Cash Levels

Bloomberg reports that there is more cash on the sidelines than at any time since 1990. Currently $8.85 trillion is being held in cash, money markets, and bank deposits. This is nearly equal to 75% of the market value of U.S. companies. In the previous 8 instances when cash peaked relative to the market's capitalization, the S&P 500 rose an average of 24% in 6 months.

Federal Reserve Chairman Bernanke reiterated that he intends to keep interest rates near zero for quite some time. With cash producing such a small return, investors will eventually start moving back into stocks and stock mutual funds. The S&P 500 is up 15.6% from its 52-week low reached in late November. Was that the bottom? No one knows for sure except for future market historians and only then well after the fact. Don't try to predict the market's bottom. Stick to your asset allocation plan. If you give into fears and move everything into cash, you will inevitably miss the majority of the market's recovery when the nearly $9 trillion of cash starts to re-enter the markets.

12/26/2008 --- Investing During Recessions Beats Dollar-Cost Averaging -- High-Yield Stocks On Our Watch List

Morningstar recently did a study covering the last 63 years that compared the results of investing during recessions versus dollar-cost averaging (the technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price). The results showed that investing additional funds only during recessions provided superior returns over dollar-cost averaging, even if the recession investments were made during the beginning of recessions (as opposed to arbitrarily using the market bottom which would unrealistically imply perfect market-timing).

The point of the study was not to show that dollar-cost averaging is not useful (it is, in fact, a very good investment technique). Instead, the study shows that long-term investors who are buying when everyone else is panicking out-perform even those who consistently add additional funds to the market, in good times or bad.

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With the market experiencing the sharp pullback this year, many high-quality companies are paying handsome dividend yields that significantly exceed treasury yields and other cash investments. Here are some industry stalwarts that we are watching and are candidates for being added to our recommended portfolios:

Stock (Ticker)	Dividend Yield
3M Co. (MMM)	3.59%
Chevron Corp. (CVX)	3.70%
Coca-Cola Company (KO)	3.41%
Colgate Palmolive (CL)	2.35%
Emerson Electric Co. (EMR)	3.84%
IBM (IBM)	2.46%
Intel Corporation (INTC)	3.95%
McCormick & Co. Inc. (MKC)	3.05%
Merck & Co. Inc. (MRK)	5.24%
Microsoft Corporation (MSFT)	2.72%
Pfizer Inc. (PFE)	7.49%
Procter & Gamble Co. (PG)	2.64%
Union Pacific Corp. (UNP)	2.30%

12/22/2008 --- LIBOR Rates Continue To Improve

Over the past 6 trading days, the interest rate for bank-to-bank loans (LIBOR) continued to improve, falling to 1.47%. This is its lowest level since June, 2004, creating further evidence that the credit crunch is steadily improving. The spread between LIBOR and 3-month treasuries (the TED spread) also fell over the last six trading days, closing at 1.45%. For the economy to turn around, these rates need further improvement, but the steady decline over the last several weeks is encouraging.

12/16/2008 --- Fed Cuts Rates To Near 0% -- Market Responds

In an effort to stimulate the stalled economy, today the Federal Reserve slashed its target for overnight interest rates to a historic low range of zero to 0.25%. In addition, the Fed also said "The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability." Wall Street embraced the move as evidenced by the the S&P 500 rising 5.1% today. The number of stocks advancing outnumbered those declining by 5-to-1 on the New York Stock Exchange, where volume came to 5.81 billion shares, up from 4.37 billion on Monday.

The Fed has other initiatives in place and on the drawing board. Early in 2009 the Fed plans to start a $200 billion program to increase the availability of student loans, auto loans, and other consumer loans. The Fed is considering buying substantial amounts of longer-term Treasury securities in an effort to lower rates on those securities and help boost the economy. Last month the Fed announced a plan to buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac.

The move "will go down in the annals of Fed history," declared Stephen Stanley, chief economist at RBS Greenwich Capital. "I nominate this one to be called the `Who Could Ask for Anything More?' statement. The Fed is throwing everything in its arsenal."

Many are predicting that mortgage rates will fall to 5% or lower and home equity loans will get cheaper, with the result being billions of dollars in the American consumer's pockets. Credit card defaults should also fall as a result.

In addition, President-elect Barack Obama has been promoting an economic recovery plan that will create many jobs by making large investments (the biggest in 50 years) in rebuilding the nation's infrastructure: highways, bridges, and other public works projects.

Today's moves were important to avoid a deflationary spiral. Since the November 20 low, the S&P 500 has moved up 21.4%. For these gains to hold, the credit markets must continue to make further improvement. Stay tuned.

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