“It is a characteristic of major [market] lows that virtually all market participants lose faith in the effectiveness of policy action just before it begins to gain some traction.”  (Credit Suisse economics team, March 30, 2009).  We agree that the public is generally skeptical toward many of the government’s policy actions.  We also believe, however, that some of those policies are beginning to gain traction.  At the end of last year, we implored investors to give them time to work.  We continue to feel that way.

We also share with you the following words from Mr. Jeremy Grantham, a well known money manager (March 2009):  “As this crisis climaxes, formerly reasonable people will start to predict the end of the world, armed with plenty of terrifying and accurate data that will serve to reinforce the wisdom of your caution.  Every decline will enhance the beauty of cash until, as some of us experienced in 1974, ‘terminal paralysis’ sets in.  Those who were over invested will be catatonic and just sit and pray.  Those few who look brilliant, oozing cash, will not want to easily give up their brilliance.  So almost everyone is watching and waiting with their inertia beginning to set like concrete.  Typically, those with a lot of cash will miss a very large chunk of the market recovery.

“Perversely, seeking for optimality is a snare and delusion; it will merely serve to increase your paralysis.  Investors must respond to rapidly falling prices for events can change fast.  In June 1933, longbefore all the banks had failed or unemployment had peaked, the S&P rallied 105% in 6 months.  Similarly, in 1974 it rallied 148% in 5 months in the UK!  How would you have felt then with your large and beloved cash reserves?  Finally, be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.”

There is growing evidence that a) the policy actions of the Fed, in particular, are beginning to work and b) most economic indicators are in a bottoming process and some are demonstrating improvement.  The recently launched PPIP program by the Treasury designed to remove toxic assets from banks has merit, and the recently expanded TALF program of the Fed should prove successful in stimulating credit
activity.  We acknowledge that unemployment and other indicators could worsen throughout the year.  However, there is always a lag associated with policy implementation.  Thus, we anticipate the rate of decline will slow as the economy begins to recover.   

While we are reticent to identify a market bottom, we are comfortable suggesting that coordinated global policy action has definitively removed the risk of systemic collapse.  Risks remain as Europe’s problems are becoming more acute.  The G‐20, however, has forcefully demonstrated its commitment to assisting in the recovery process.  While this development was, perhaps, long overdue, we are encouraged by the recent adoption of a more aggressive and coordinated posture.   

We caution investors that volatility will remain high and that the credit markets have yet to fully embrace the recent optimism in the stock market.  Therefore, patience should continue to be rewarded.  We further acknowledge that recent governmental actions with regard to corporate management are disconcerting.  However, we feel such actions were necessary, and in the future, we anticipate similar actions will be isolated to extreme circumstances.  Eventually, the market will shift its attention from crisis toward renewed growth.  In that context, we are fascinated with how the global economy will fare in an environment of considerably less leverage and considerably more regulation.  While this prospect might discourage many investors, we look forward to a world of more sustainable, higher quality economic  growth.  We recommend that investors remain well diversified, and we look forward to discussing with you the reasons for our growing optimism.