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Market Commentary
January, 2010
As we begin 2010, the daily newspaper reports tell us that the
economy is on the mend and indicators are suggesting that the
recession is ending. In many ways, things seem better than at the
beginning of 2009. The stock market has stabilized, fewer people are
losing their jobs and other reports tell us the economy is in the early
stages of a recovery. But is it really smooth sailing ahead?
As I look forward… there are several major issues which threaten to
drown chances for a real recovery.
First, taxes….which are expected to rise in 2011 to support health
care reform. As such, when you include the Bush tax cuts which will
end at the start of 2011, the top income tax rate, including state
taxes, will average 52% across America. The top capital gains tax rate
will increase from 15% today to 25% and the tax on dividends will
also increase substantially. Needless to say, these increases will stifle
investments, business start-ups, business expansion and overall
economic recovery.
Another factor which will affect the economy in 2011 is un-
employment. As once stimulus spending declines and this money is
used up, state and local governments will either have to cut back
jobs or raise taxes substantially.
The third factor that will have to be addressed in 2011 is higher rates
of inflation…and considerably higher interest rates, the result of a
weak dollar policy and our huge current deficits.
When you put all of this together, 2011 is shaping up as the
beginning of a particularly troubling time….ie: higher inflation,
higher interest rates, continued high unemployment and continued
economic stagnation.
Needless to say, I hope I’m wrong. It’s always possible that the
current administration will re-think their current economic policies
and reverse course. It’s also possible that the Federal Reserve will
indeed engineer a soft economic landing. But over the years I’ve
found that being hopeful has never proven to be a sound investment
strategy.
In closing, I see continued difficulties ahead. Interest rates could
begin rising soon…Then the question begs… when and by how
much?
As such, bonds aren’t the same good investment today that they
were in the past year. Credit markets have stabilized, and thus bond
yields have declined dramatically.
So the challenge as a portfolio manager is what to do with the cash
that will begin building in client portfolios as bonds mature and are
redeemed?
To date, I’ve been purchasing securities that pay predictable high
dividends such as preferred stocks, utilities, oil and gas pipeline
stocks, pharmaceutical stocks, etc. I’ll also have higher than normal
cash balances in money market accounts awaiting higher interest
rates.
This could result in rather sub-par returns for this next year, but as
the late Will Rodgers once quipped…”there are times when the
return of your money is much more important than the return on
your money”.
For the present, equity markets look okay, as very low current
interest rates give yield starved investors very little choice other than
dividend paying equities. But this could change at any time.
Hopefully, my fears won’t come to pass, the fog will lift…and there’ll
be bright sunshine ahead, but until I can see more clearly, I’m
proceeding cautiously.
Thank you for your continued confidence.
Charles De Rose
January, 2010
As we begin 2010, the daily newspaper reports tell us that the
economy is on the mend and indicators are suggesting that the
recession is ending. In many ways, things seem better than at the
beginning of 2009. The stock market has stabilized, fewer people are
losing their jobs and other reports tell us the economy is in the early
stages of a recovery. But is it really smooth sailing ahead?
As I look forward… there are several major issues which threaten to
drown chances for a real recovery.
First, taxes….which are expected to rise in 2011 to support health
care reform. As such, when you include the Bush tax cuts which will
end at the start of 2011, the top income tax rate, including state
taxes, will average 52% across America. The top capital gains tax rate
will increase from 15% today to 25% and the tax on dividends will
also increase substantially. Needless to say, these increases will stifle
investments, business start-ups, business expansion and overall
economic recovery.
Another factor which will affect the economy in 2011 is un-
employment. As once stimulus spending declines and this money is
used up, state and local governments will either have to cut back
jobs or raise taxes substantially.
The third factor that will have to be addressed in 2011 is higher rates
of inflation…and considerably higher interest rates, the result of a
weak dollar policy and our huge current deficits.
When you put all of this together, 2011 is shaping up as the
beginning of a particularly troubling time….ie: higher inflation,
higher interest rates, continued high unemployment and continued
economic stagnation.
Needless to say, I hope I’m wrong. It’s always possible that the
current administration will re-think their current economic policies
and reverse course. It’s also possible that the Federal Reserve will
indeed engineer a soft economic landing. But over the years I’ve
found that being hopeful has never proven to be a sound investment
strategy.
In closing, I see continued difficulties ahead. Interest rates could
begin rising soon…Then the question begs… when and by how
much?
As such, bonds aren’t the same good investment today that they
were in the past year. Credit markets have stabilized, and thus bond
yields have declined dramatically.
So the challenge as a portfolio manager is what to do with the cash
that will begin building in client portfolios as bonds mature and are
redeemed?
To date, I’ve been purchasing securities that pay predictable high
dividends such as preferred stocks, utilities, oil and gas pipeline
stocks, pharmaceutical stocks, etc. I’ll also have higher than normal
cash balances in money market accounts awaiting higher interest
rates.
This could result in rather sub-par returns for this next year, but as
the late Will Rodgers once quipped…”there are times when the
return of your money is much more important than the return on
your money”.
For the present, equity markets look okay, as very low current
interest rates give yield starved investors very little choice other than
dividend paying equities. But this could change at any time.
Hopefully, my fears won’t come to pass, the fog will lift…and there’ll
be bright sunshine ahead, but until I can see more clearly, I’m
proceeding cautiously.
Thank you for your continued confidence.
Charles De Rose