Investment Outlook

The following post is from Orion Capital Management – a Coronado owned and operated independent investment firm that manages assets for a broad spectrum of clients. Dear Investors, For the first two months of 2009, financial markets around the world have continued to slide. As of the end of February, the S&P 500 Index was down 18.6% year-to-date. Many stock markets around the world are also at multi-year lows, with the exception of China, whose Shanghai Composite is up 14% so far in 2009. U.S. government bonds have also gained ground lately. The yield on the 10-year Treasury note has fallen to 3% now from its pre-crisis 4% level. Economic data continues to be grim. The U.S. economy shed 651, 000 jobs in February, bringing the tally of jobs lost during this recession to 4.4 million. The unemployment rate is now over 8%, the highest it has been since 1982, and the number of economists predicting a double-digit unemployment rate by year’s end is growing. Unemployment tends to be a lagging indicator for the economy, however, and more so for the markets. Historically speaking, the unemployment rate typically continues to climb for months or even years after the markets have bottomed and the economy has begun to recover. While there appear to be no clear signs yet of a turn in the economy, there are government initiatives now underway which have the potential to turn, or at least arrest, the growing pessimism of investors. First, several programs are underway to alleviate the pressure on homeowners who are upside down in their mortgages. Second, the $787 billion stimulus package that President Obama signed into law last month will also begin to aid the economy in coming months and years. Finally the $200 billion TALF, or Term Asset-Backed Securities Loan Facility, will aim to see that credit remains available for auto loans, student loans and credit cards. In my opinion, the single most important thing Washington can do now to help sentiment in the markets would be to reveal its plans for stabilizing our banking system. Progress on this front has been excruciatingly slow. Clearly fixing what ails our banks is a big job that requires much consideration, but with markets open everyday while Washington tosses ideas around, traders are taking their frustrations out on stocks. Happening right now are so-called “stress-tests” for the nineteen largest banks in the country. The purpose of these tests is to determine which banks will require more capital under more dire economic circumstances and how much they will require. Ideally, when the Treasury’s findings are released and the government has begun to act to shore up the system, investors could begin to think about something other than the prospect of insolvency for our banking system as a whole. Overseas the economic situation is mostly worse than here in the U.S. Eastern Europe, in particular, is suffering mightily as many people there took out low-interest home, auto and business loans in Euros and Swiss francs. Seemed like a good idea at the time, but now their domestic currencies-the ones in which their salaries are paid-have declined precipitously versus the harder currencies of Western Europe. Repaying their debts just became a lot harder. If there is one economic bright spot in the world today, it has to be China. Even though Chinese exports have dried up as U.S. consumers have begun to save more, domestic consumption remains healthy. Furthermore, the government has committed to a stimulus package of $585 billion, roughly 20% of GDP, to be spent by the end of 2010. (This stimulus is not quite as large as it sounds, however, as the headline number includes projects that were already in the government’s project pipeline.) Still, as recently as this week Chinese Premier Wen Jiabao reaffirmed that he expected China to notch an 8% GDP growth rate this year. This is obviously a very difficult time for Americans and there are no easy answers or quick fixes for our economic problems. However, one day this recession will end. Our consumers and our banking system will recover to firmer ground and there will be growth again and reasons for optimism. In the meantime we must all hope that the government takes suitably aggressive action to combat this painful downturn. As usual, I welcome your comments and feedback. Best Regards, Peter About Orion Capital Management LLC Founded in Coronado, California in 2002, Orion Capital Management LLC is an independent investment firm that manages assets for a broad spectrum of clients. The firm’s customized portfolio management services are grounded in independent investment research and objective judgment. Peter C. Thoms, CFA, Founder & Portfolio Manager 1330 Orange Avenue, Suite 302 | Coronado, CA 92118 Tel: (619) 435.1707 Fax: (619) 435.1706 Email: [email protected] Web: www.orioncapitalmgmt.com