January 8, 2010

Happy New Year!  I hope your holiday season was pleasant.

With 12/31/09 we ended another decade and what a decade it was!  We can now see an economic recovery but how much and for how long is very much up to debate.  The economy is being medicated with low interest rates, fiscal stimulus, tax credits and guarantees thus it is not easy to determine how the economy is really doing if all these artificial stimulants were removed.  An article I recently read referred to it as trying to analyze a sick child who has a lot of Tylenol in him and that if you remove the Tylenol you will see how really sick the child, is but you certainly don’t want to remove the Tylenol.

As I stated last quarter, I think that without the Government stimulus we would have surely fallen off a cliff and be in the midst of a depression.  That being said, we now have the largest amount of Government spending since World War II as a percent of GDP.  Government agencies Freddie and Fannie now buy or guarantee over two-thirds of all US mortgages.  Our Government also effectively owns the largest auto company and one of the largest insurance companies (AIG) as well as being the majority shareholder of many banks and other financial institutions through programs such as TARP and FDIC.

While the economy seems to be heading up in many areas there are some very disturbing things lying in the wings.  One of the most distressing is that 88% of the option ARM loans have yet to reprice.  Without repricing 46% of them are 30 or more days behind in their payments.  When these loans reprice in the very near future the delinquency rate is likely to go through the roof.  In addition to that, the number of excess houses available on the market instead of going down has in fact increased.  Therefore we should see significant further degradation of real estate prices.

With all that being said we have always managed to work our way out of these messes and with intelligent Government actions we should be able to do it again.

On a brighter note, the S& P 500 gained 26.5% including reinvested dividends in the calendar year which is the second best performance for the decade other than 2003.  What is even more impressive is that the S&P 500 has gained an average of 9.4% per year over the last 50 years (1960 through 2009).  On a sad note, this last decade the S&P 500 was down 9.1% for the ten years ending 12/31/2009 which is the worst performance since the 1930’s.

Several people have contacted me regarding Gold which we are able to buy but choose not to. Gold prices rose to an all-time high in November 2009 which represented a 24% increase for the year.  That pales in comparison to oil prices or gas prices which were up 78% and 63% respectively.  I can bore you all day long with the performances of various components of the market but will not do so more than I have already done.  We will continue to look for and do our best to find investments for you that make sense.  The classic example of course is Starbucks.  Starbucks is a great company but at $40 per share is a lousy investment.  Starbucks at $10 per share is a great company and a great investment.

Again, I thank you for your business.  You will be receiving in a separate mailing our Privacy Notice and offer to send to you our ADV Part II.

Yours truly,

Willis         

Willis Ashby, CFP ®

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