TREES INVESTMENT COUNSEL VIEWPOINT (Q1 2010) 

2010 is exceeding our expectations.  While we have been making net additions to stock portfolios for the last year, in our most recent purchases and sales we modestly raised reserves for most clients.  This tactical shift is a reflection of the strong stock market advance over the last year.  We simply wish to have the ability to make purchases should more attractive opportunities arise in the coming months.  As we have indicated, we feel a more volatile but less upwardly advancing equity market calls for a higher activity level.

Bond yields remain near post World War II lows as the Federal Reserve continues to maintain short-term rates near zero.  However, they have begun to withdraw liquidity from the markets and modest growth in bank lending should come soon as the economic recovery is a year old.  Despite more than ample slack in labor markets and production capacity, any increase in the velocity of money, with so much of it around, could quickly ignite price increases.

The public has been on a bond-buying binge, as have banks and foreign institutions and governments.  Thank goodness, because our government needs to issue an ever-increasing amount of debt to stay afloat.  Whether more and more buyers will be available to soak up this debt, and what yield they will demand, doesn't yet seem to be a topic for discussion.  Rising rates and a greater focus on the burden of our expanding federal deficit will force the issue.

The pace of the economic recovery is still being hotly debated.  We are basing our investing policy on a fairly muted economic recovery over the next year or two due to the negative effects from the financial meltdown, as well as the inevitable increases in federal and state taxes staring us in the face.  Statistics indicate that tax increases have a negative impact on GDP 3x the size of the tax hike!

While we may sound unconstructive, we have faith in the righting of the economic ship.  The near term may be choppy, but we see longer term smooth (or at least smoother) sailing.

April 16, 2010