TREES INVESTMENT COUNSEL VIEWPOINT (Q3 2009) 

Trick or Treat? As Halloween approaches, investors remain spooked on the stock market .  Once burned, twice shy.  How about twice burned? After being whacked with two recessions and minimal stock returns over the past ten years, investors seem content or at least hunkered down with zero return cash in money market funds and exceedingly low fixed income returns.  Yet with the Standard and Poor's up 62% from the March lows, and a 20% rise this year, is it too late to look at the glass as half full?

Admittedly the economy has been shaken to an extent that most of us have not seen in our lifetimes; the issues remain complex and deep rooted even for the most educated and astute.  Government intervention and stimulus has been extensive and will likely continue, particularly with the high levels of unemployment, which could linger for a prolonged period. 

As much as pundits like to focus on the negatives, there are some powerful positive signals that should  not be ignored.  Housing is closer to a bottom, GDP growth fell less than 1% in 2Q (and is moving into positive territory), and productivity and company profits are rising.  Credit spreads have narrowed greatly in the past 6 months, indicating lower cost access to capital for company growth and the capital markets have opened for IPOs as well as merger deals.  Also, there is some comfort in the fact that the world is more globally tied than ever, and countries such as China, India and Brazil, among others, are growing even while our domestic economy sputters, helping prop up demand.

While some areas of the market may be arguably overheated, shares of the top quality companies in which we invest still have reasonable valuations and promising growth prospects.  We remain intrigued.  After all, even with the roaring comeback, the stock market remains down 30% from the October 2007 highs. 

The bond market, and Treasuries in particular, has been the place to hide for the past year, but at some time that party has to come to an end, and it will likely be in the not-too-distant future.  It is a game of chicken until interest rates start rising again.  We are keeping durations in the intermediate term and are looking to take advantage of pricing inconsistencies or unique structures.

Don't be scared.  There will always be ghosts and goblins lurking, but if we take measured steps, we will navigate through the maze.  

October 23, 2009