Thankfully It Is March

Let's take an account of how we are doing this year. Last week ended in typical fashion with the DOW down 4.1% and the S&P 500 down 4.5%. This puts those indices down 19.5% and 18.6% respectively for the first two months of the year. At this pace the market might drop 62% in 2009. So where's the rally? If it comes, it may only be short lived.

GDP was revised downward for the fourth quarter as the decline was greater than 6%. We have been saying the economy is getting worse and it clearly is. Unemployment keeps producing 600,000 plus job losses each week and will likely continue for awhile. The banking system is in a shambles as the equitizing of the Citi balance sheet portends bad news for other large banks. We don't think Citi is free and clear and BofA and Wells Fargo could be next on tap for some new government medicine. This is going to be a long painful process to rid the financial system of the leverage and excesses of the past decade. It can't be fixed over night. Hence, neither can our economy.

Warren Buffett's recent shareholder letter is plain and clear as he says the economy is going to be in bad shape for years to come and he is uncertain as to when the markets will go up. This opinion explains the structure of many of the Berkshire deals in the past six months as Mr. Buffett is buying debt with big coupons and getting equity kickers for potential upside in a company's stock. He is happy to collect a large coupon with a free option on the stock price. We love his thinking. That said, many of Berkshire's other investments are tied to the stock market and could produce red ink in these volatile markets.

We keep searching for the tea leaves but lately it is hard to find any glimmer of hope. We find it a little disturbing that the Geithner plan is rolling out very slowly. Investors need direction and thus will sit on the sidelines until there is some clarity about all the government actions to fix the financial system. The Obama budget also brings bad news. In these difficult times, whether one is rich or poor, everybody is feeling some economic pain. How can this administration propose increased income taxes and capital gains taxes on those earning greater than $250,000? Most Americans are cutting back and the expectations of increased taxes will accelerate the decline in spending while reducing the dollars available to propel the capital markets to function normally. President Obama is keeping his promises to tax the "rich" but it is poor economic policy in these strained economic times. The only worse legislation will be for Congress to jump on the bandwagon and increase the taxes even more. We will wait to see the response from our beloved Senators and Congressmen.

Tomorrow is the beginning of a new month for the markets. It should be a fun day as the snowy weather in the northeast could bring a chill to the week. The government is reporting construction spending, manufacturing activity, and personal income. Let's hope the number are bad but not disastrous. Perhaps a brief rally will appear but the negative news shall persist. The markets need to fully digest the upcoming economic weakness and discount stock prices enough so investors can start to put some cash back into the market. Most sophisticated investors are happy to sit on the sidelines until businesses can once again feel comfortable predicting their futures. Until CEOs and CFOs can foresee how much business they will do next quarter, why should investors throw the die? Let's hope some new tea leaves start appearing soon.