Economic Update: March 23, 2009

What we'd like to do is address this update in 2 main parts:

1^st- A capital markets overview, there has been so much going on! We will attempt to explain it as simply as possible.

2^nd- Give you an intelligent, informed, actionable idea centering on what you can do right now to position yourself to move forward in 2009 toward your future goals

Let’s begin the overview of the capital markets by identifying the problem: nobody has any confidence in the financial strength of the nation’s biggest banks. Banks don’t even trust one another because no one is sure of the value of the loans and securities currently held on their books. The truth is, some banks will make it through this recession…and some won’t. This uncertainty has caused borrowers to have trouble getting loans and banks have been unable to sell loans or securities they don’t want.

So what is the solution?

The big news today was Secretary of the Treasury Tim Geithner’s plan to fix the banks. The plan is more easily digested when thought about it as a three-pronged plan:

1. Get enough capital into the 19 biggest banks so that everyone believes that each can withstand a bad recession.
2. Get toxic assets off their books so banks will pick up the pace of new lending.
3. If the first two points are well executed, investors will regain confidence in our financial system.

Before this recession comes to an end, the credit markets must become fully functional and liquid once again.

If you watch CNBC, you might not be aware that the Fed is actually having some success in thawing out these markets. The Asset Backed Securities market is critical for keeping credit flowing to consumers (it made up roughly 40% of real estate lending before the crash). The Term Asset-Backed Securities Loan Facility launched last Thursday is what the government has put in place to get this market moving again. It allows hedge funds and other investors to borrow from the central bank at low rates so that these investors can now go out and buy newly issued securities backed by consumer financing such as auto loans and credit card debt. On Thursday and Friday alone, $4.7billion was accessed and three deals (Citi, Ford, and Nissan) went through. This is viewed as a very good sign that money is coming back into the asset backed securities market.

Many believe that a healthy credit market begets a healthy equity market...

Today the S&P has witnessed its largest comeback since 1939. And, although today’s prices may not be rock bottom, they do provide a margin of safety for the long term investor. Jeremy Grantham, one of Wall Street’s most infamous bears, came out this weekend in Barron’s advising individual investors to be ready to get back into the market “you absolutely must have a battle plan for reinvestment and stick to it.” We certainly agree with Grantham’s point. “In an environment where assets are still being re-priced and balance sheets are being restructured, it is still wise to be cautious”- however, we would encourage every investor to develop and be truly comfortable with a reinvestment plan back into the markets.

With more than a trillion dollars flooding the market, we believe investors should be wary of the risk of inflation. Last week we saw the dollar decreasing in value because of these fears. What is a way to protect yourself? Diversifying your portfolio by keeping a healthy weighting in both the developed and developing worlds is a great way to mitigate this risk. International markets look attractive for a few other reasons:

Central banks in the developed world have, for the most part, done their best to mimic the comprehensive policy actions of the Fed. After China unleashed its own $585 billion stimulus plan in November, its local stock market has gone up 33%.

For the long term, growth in emerging markets will continue to outpace that of the developed world. The advantage of emerging market exposure corresponds directly to the relatively non-existent debt burden compared to the developed world, namely the United States. Citizens in these countries can simply consume from the higher savings rates they have built up over time. Imagine yourself for a moment. Every month the credit card has to be paid prior to the enjoyment of new purchases. The citizen in the emerging market country can go straight for that new purchase. Growth, without the need for financing, will propel these economies forward as the burst of global demand catalyzes from fiscal and monetary stimulus on a global scale.

So now we have covered why there currently are tremendous opportunities in both the US and International, equity and fixed income markets. What is the key takeaway that you can leave here with today? If there was anything we would want you to remember, it is this: The definition of investment success is changing in today’s world. Everyone in this room has investment goals, and, what we learned in 2008 was that we were focused on the wrong measure in our portfolios. Return at all cost...in some cases, at any cost. What we should be thinking about, especially since return can function well beyond our control, is risk. We can quantify the amount of risk we need to take to meet our goals within a given time frame, and we can feel it when we move an uncomfortable level beyond our own, individual tolerance. When you decide to do this as an individual investor, what you are doing is taking on the mindset of the most successful institutional investors in the world. In the words of David Swensen, CIO of the Yale Endowment, "Focus on asset allocation relegates market timing and security selection decisions to the background, reducing the degree to which investment results depend on…unreliable factors.”