2009 Q4 client letter

We hope you enjoyed a restful holiday season and have had a good start to the New Year.

In this quarterly letter, our aim is to provide a review of Q4 2009 as well as a look ahead at 2010, which we’ve separated into an attachment titled “10 economic themes for 2010”.

In the fourth quarter of 2009, risky assets (stocks, commodities, low-grade bonds) added to mid-year gains, while safe-haven treasuries continued their descent from the panic highs of last year (the ten year yield has gone from 2.06% to 3.84% over the year as investors took on more risk).  Strong government support remained the order of the day against a backdrop of continued economic weakness, as the unemployment level rose above 10% for the first time since 1983.  The Federal Reserve kept short-term rates at 0.00-0.25% (boosting bank earnings) and fiscal stimulus continues (extended unemployment benefits, housing purchase credits, etc). The scale of government support in all forms is remarkable and we believe much of the economic landscape over the next few years will be determined by how this support is withdrawn, and how the long-term debt created by these expenditures is tackled.

Our view remains that high levels of unemployment, household debt-reduction and tighter credit standards will continue to keep growth rates at very moderate levels. We consider stock market valuations to be over-stretched and continue to believe the current stock market rally is unsustainable.  Prior to raising equity allocations, we would like to see a sustained organic recovery (as opposed to one supported by government stimulus spending) or far more attractive values.

We look forward to speaking with you during the quarterly review and wish you the best over the coming year.