| 2009 4th Quarter Newsletter |
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October, 2009 Life in America, with our new President and Congress, has an undercurrent level of uncertainty. While the anxiety and fear about what is happening in our world has waned since the fourth quarter of last year and the confidence of investors in America has improved significantly, we still have to deal with the many financial and political problems at hand. As we mark the oneyear anniversary of the collapse of Lehman Brothers and the most severe drop in the stock market in almost 80 years, investors justifiably wonder what could happen next. Will the Real Stock Market Rally Please Stand Up? Many economic analysts and money managers believe that the U.S. economy is in a “new normal” of slower economic growth with a “frugal future” lasting for years in which consumers and businesses save more and purchase less. From this perspective, with lower consumer demand and business profits going forward, companies may find themselves starved for capital and be required to issue more stock to fund their operations. The result, these so-called experts believe, is that stock values will be fundamentally diluted in the long term, and thereby may not perform as well as they otherwise would. On the other hand, factors that point to continuing improvement in the economy and the rise in equity markets are multiplying. First, many of the gains to date are seen as the “rebound” after an unjustified and panicked rush-to-liquidity sell-off; whereas, a new bull market rally, based on a sustained economic recovery, has yet to begin. Economic growth may be propelled by lean, streamlined companies with high productivity and profit margins that have put off starting to rehire. Moreover, sentiment toward stocks could turn more positive as investors realize their value relative to other asset classes. Cash on the sidelines is still at higher-than-normal levels and earning almost nothing in money markets. The tendency is for investors to consider equities, since their cash is earning so little. Also, flows into equities could increase from investors and money managers who worry about missing the next big move up. As for foreign economies and equity markets, some experts contend they will recover better than the U.S. markets, since they were not affected to the same extent by the credit crisis. In addition, it is important to note that 40% of the revenues of the 500 largest U.S. companies are derived from operations in foreign economies. PCM’s perspective is that at this point in the so-called recovery, “caution” is the watch word. While we are pleased to see that the panic over the banking and financial systems worldwide has dissipated for the moment, and the confidence by investors in the equity markets has improved significantly, we are ever more focused on rising unemployment (recently 9.8%). U.S. savings rates were hovering at about 0% roughly one year ago, and today are close to 8%, reflecting the fear and concerns that investors have about the world around them. We are also very aware that the velocity of money has slowed significantly and loans are predominately for the already wellcapitalized, who already have high credit ratings. The continual expansion of the financial stimulus or support packages instituted by the U.S. government is problematic, and the number of success stories about recipients of those trillions of dollars promised is noticeably absent. Meanwhile, tax increases are just around the corner. Together these factors make for a very uncertain time to invest in businesses and, from a more macro viewpoint, to revitalize and expand our economy. Roth IRA Conversion… An Opportunity Waiting in the Wings! In August 2006, President Bush signed the Pension Protection Act of 2006. Beginning January 1, 2010, the bill allows all owners of IRAs to convert traditional IRAs to Roths by eliminating the MAGI provision. Prior to this date, IRA owners must have MAGI (Modified Adjusted Gross Income) under $100,000 to be eligible to convert traditional IRA assets to a Roth IRA. Most importantly, the bill allows an unlimited amount to be converted to a Roth IRA!
Irvin |
