A New Week of Uncertainty

Last week the market dropped as earnings season is coming to an end and the financial institutions have begun to recapitalize their balance sheets. Markets soared from the March 9 lows as tidbits of positive economic news fueled investor sentiment. The world began to enjoy economic news that wasn't as bad as much as it had been recently. Sounds great. Business continues to be weak, unemployment is rising, but production picked up a little and the retailers saw some light. Consumer sentiment ticked up, smiles came across peoples' faces as spring began, and the stock market began to fixate itself on the impending recovery. We don't believe everything is quite so cheery.

Gas prices are on the rise which won't make consumers happy. Most businesses whether large or small tell us they are not very optimistic about the near future. Of course, most companies have seen a slight improvement in sales but how much is related to an inventory build. Business shut down in the fourth quarter of 2008 so any positive news in the first quarter was welcome. Does that mean stocks are off to the races and everything is fine? Clearly not as toxic assets remain on the books of financial institutions, commercial real estate is heading for trouble, corporate bankruptcies are rising, and consumer defaults will multiply.

Nobody, including us, wants to miss the next bull market but we think a true economic expansion is a long way off. The government is providing stimulus and the Fed has grown the monetary base but consumers are in saving mode, businesses are cutting costs not investing, and financial institutions are garnering huge capital markets fees but not driving business growth through the lending machine.

Stocks discount the future but sometimes they overshoot on the downside and sometimes they overshoot on the upside. March was a point in time where fear was high and nobody wanted to lose more money in stocks as the economy cratered. Stocks are much higher today and nobody wants to be in cash as stock prices move up. As it becomes apparent that economic activity will slow again, stocks could continue the downward trend. We remain cautious and hedged.