2009 Q3 client letter.
We hope you had a pleasant summer and are enjoying the start of autumn.
The third quarter was very eventful, both for us as a firm and for the markets in general.
In the financial markets, the events of 2008 continued to reverberate and color all economic activity. After a precipitous drop-off in trade and consumption in the first half of the year, global economic activity began to rise from extremely low levels. Some of the more dire scenarios that had seemed possible just six months ago now look a little more remote. That said, economic activity in most developed countries continues to be far below recent levels and capacity. Unemployment continues to rise in the US and in many parts of Europe. In addition, the commercial real-estate market is suffering, many retailers are struggling to meet sales forecasts, and concerns remain about the holiday shopping season. Federal incentives have supported automobile and home sales, but we view these as temporary measures and not long-term solutions. We believe that unemployment, deleveraging and high savings rates will continue to keep growth rates at very moderate levels for some time to come. American consumers and industry remain cautious, and most participants have accepted that this recovery will be protracted and slow.
The summer also saw very large moves to the upside in both bond and stock markets, particularly in the high risk segments. Along with increased risk-taking, interest rates for intermediate and long-term treasuries have risen from panic lows, with the 10 year yield moving from 2.06% on December 30th to 3.29% today. Meanwhile, the Federal Reserve remains committed to keeping short-term rates at very low levels and the 2 year rate remains under 1%. We continue to believe the Fed will refrain from any material tightening until the end of 2010 as inflation is not a concern at the moment. However, we may see a swift rise in intermediate and long-term rates with any tightening, and have begun to position bond portfolios to take advantage of reinvestment opportunities when that happens.
We remain skeptical of the rally currently underway in global stock markets, and would like to see evidence of a sustained organic recovery (as opposed to one supported by stimulus spending) before we commit any additional capital to risk assets. From past experience, banking crises tend to cast a shadow on markets for a number of years, and we do not believe this episode will be different.
Meanwhile, on the local level, we used the summer to finalize our transition to the independent advisor model and launch a discretionary investment strategy called “Global Macro 10” which we have been discussing for some time (September was the first complete month of performance for this portfolio). Late this month Subir also learned that he had been awarded the Certified Financial Planner™ (CFP®) designation (Louis plans to follow Subir’s lead and will begin working towards his own CFP designation).
We look forward to speaking with you soon and wish you the best over the coming months.