TREES INVESTMENT COUNSEL VIEWPOINT (Q4 2008) 

The fourth quarter investment returns for all but US Government securities were so poor that commentators find nothing but the depression of the 1930s an adequate parallel.  We, even in our most somber moments, never expected to see the world markets, rapidly followed by the world economy, so devastated.

The sub-prime mortgage crisis has led to an overall financial and credit contagion, and in turn business activity from Detroit to Beijing has come abruptly to a halt.  Once stalwart banks across the globe are showing vulnerability and in some cases are desperate for (or are receiving) a lifeline.

Many of the issues coming to the fore over the last few months are ones we and others have worried about; others we never knew existed, nor would we have predicted the colossal ramifications.  Governments around the globe are embarking on an unprecedented campaign of monetary ease and fiscal stimulus to prevent their economies from declining 5-10% in 2009, and to thwart unemployment rates from skyrocketing to double digits.  They see the decade-long declines of the 1930s in the USA and the 1990s in Japan as worth avoiding at any cost.

Needless to say, we do not profess to know which way things will turn and when.  The US economy, by consensus, in expected to bottom over the next 6-18 months.  The world economy is likely to be flat in 2009.  The stock market forecast is -20 to +30, the bond market expectation is -10 to +15.  We should have deflation for a few months and then modest price increases.  The dollar is generally expected to rise.  Longer term, there is great fear of out-of-control inflation from massive government spending.

We have discussed with some clients a reduction in their equity allocation to decrease the volatility of their portfolios.  If you would like to discuss this issue or any others, please feel free to give us a call.  Otherwise, to the extent there are cash reserves available for equities, we plan to gradually add to stocks over the year - valuations are low, and we still have every reason to believe the stock market will outperform bonds over time.

While performance was aided by what cash reserves were on hand or raised in portfolios, our stock only returns generally mirrored the market last year, although they remain relatively good for the millennium.

January 23, 2009