As we write this, the stock market has rallied 13% in the month of March and has gained over 7% in April. March was the
largest increase in any single month since 1974. The rally began when Citigroup’s CEO announced, in a leaked memo,
that the embattled bank had turned a profit in the first two months of 2009. (It’s nice to know that after a $45 billion
government bailout, Citigroup can finally turn a profit.) The good news continued as Wells Fargo announced a $3 billon
profit for the 1st quarter of 2009.
Since the stock market is usually a leading indicator of economic recovery--have we seen the bottom of this
recession/depression based on the latest stock market rise? Being eternal optimists, we’d like to think we are on the
road to recovery. However, the realist in us looks at all the economic data and we say, Watch Out! We still have some
big hurdles to clear.
In short, we believe this a bear market rally, also known as a sucker’s rally. This bear market rally may still have legs.
In fact, we wouldn’t be surprised to see the Dow hit 9,000. If you still have large equity positions, this would be a
great time to severely reduce your exposure to the stock market. We also recommend selling your U.S. treasury
bonds. We believe the yields on Treasuries will continue to rise as our government finances our massive spending. Our
biggest concern is China. If they stop buying our debt or if they start selling their substantial U.S. assets, we will be
scrambling to find buyers of our debt.
Let us take the next few paragraphs to articulate our thoughts:
• Sucker’s Rallies: First let’s look at how the market performed during the Great Depression. Many people may
know that the Dow declined 89% from it’s peak in September 1929 to it’s trough in July 1932. During that time
there were seven rallies of 15% or more until the Dow finally settled at it’s 1932 low.
NYU economics professor, Nouriel Roubini aka Dr. Doom who accurately predicted the current economic and
stock market crisis, has recently called this a “dead cat bounce” or a “sucker’s rally”. He believes that there are
some major banks still in crisis due to their exposure to residential and commercial real estate. He estimates the
banks will need $2.4 trillion in additional government funding before the banks are on solid footing.
• Commercial Real Estate/credit card defaults: The banks still have tremendous exposure to commercial real
estate and consumer loans. The banks have yet to write‐down the value of their CRE holdings‐‐maintaining a
95% value on their books. The delinquent unpaid balance on commercial property loans grew for the sixth
straight month, up over 244% from one‐year ago. Foreclosure and REO categories grew for the 15th straight
month – up over 216% in the past year. In a recent FDIC auction of commercial real estate, the auctioned assets
fetched 50 cents on the dollar.
As unemployment continues to increase, watch for credit card and auto loan defaults to skyrocket in addition to
increasing residential foreclosures.
• Increased Regulation/Taxation: Our country needs job creation in the private sector, and government should
be championing the cause. We need wealthy entrepreneurs to put their money at risk to create new businesses
that hire people. Instead, the government has created an unfriendly business environment. They are promising
to raise taxes on the most productive citizens in order to redistribute the money to the least productive. And
until the climate changes, we are not optimistic about the future of private sector job creation.
George Bernard Shaw once said, “A government that robs Peter to pay Paul will always have plenty of support
from Paul.”
• Government take‐over of private industry: It started with the banks and now they are seeking to extend
their reach. The Secretary of the Treasury has recently stated his desire to nationalize any company he believes
may have a detrimental impact on the economy. He particularly mentioned financial firms, insurance
companies, and hedge funds. The current administration is also making strong overtures to nationalize the
healthcare industry.
This type of government involvement should send a chill up everyone’s spine. Government investment into the
private sector tends to crowd out private investment. Bottom line, the government is not efficient. Government
agencies don’t need to make a profit and can’t go out of business. Soon, your healthcare, banking and
automobile manufacturing will be run by a government agency. To envision this just remember your last visit to
the MVD.
• Cap and Trade: The next job killer would be the institution of a cap and trade system. For many of you, cap and
trade is a new concept. Let me explain how it would work. Cap and trade would assign each business a certain
carbon output. If your business exceeded it’s carbon allotment, it would have to buy carbon credits from
another business that had excess carbon credits. In a nutshell, it becomes a huge tax on certain industries—
mainly energy companies. Those increased taxes will be passed on to the consumers (you and me).
What will be taxed more heavily you ask? Nothing of consequence really, it would just hike the price of your
electricity, gasoline, and food.
• Deflation/Inflation: Most everyone is concerned with deflation (falling prices), but in order to fight deflation,
the Federal Reserve is setting the stage for massive inflation. How you may ask? They are spending huge
amounts of money they don’t have. There are only two ways to get money you don’t have—print it or borrow it
and we are doing both. The Fed’s recently announced that they would be printing a trillion dollars. On that
news, gold shot up and the dollar declined in value. Gold and silver should do well in either a deflationary or
inflationary period.
We hope this bad economy corrects itself soon, but in the interim, we suggest investing in the following:
• 5% to 10% in precious metals (gold and silver)
• 5% to 10% in high quality energy assets
• 5% in TIPS (Treasury inflation protected securities)
• 5% in shorting U.S. Treasuries
• 5% in shorting the S&P 500
• The remainder in money markets and CDs
We realize everyone’s risk tolerance is different and thus, we highly recommend making an appointment to have your
portfolio reviewed.
Best regards,
Geoffrey W. White, CFP
John S. Peart, MBA
Aaron C. Matheny, MS, BCE
John L. Olsen
