Investment Forecast for 2010 - Investor Update from Blake T. Todd

Crowell Weedon & Co.

Your Independent Investment Team

Established: 1932

Members SIPC / FINRA

Welcome to a New Year – 2010

Dear Fellow Investors,

We certainly live in a world that is full of risks so I will now take the boldest risk that anyone in finance can do – I will make forecasts for what I foresee occurring during 2010. Yes, predictions in print! Of course we all know that there is no way we can see the future and as information and events unfold we will adjust our outlook and the conclusions that are drawn from them. But, for this moment in time we offer our forecasts and some brief reasons behind each one. We will do that for all three of the major investment categories – Equities, Fixed Income and Real Estate. For more information or a more lengthy conversation we invite you to contact us. Then at the end of this letter I will stand up on my soap box a bit and give some opinions about what we face in the coming decade and beyond. So without further ado….

Interest Rates will start to rise in 2010. We see the Federal Reserve beginning to raise the short term borrowing rate from its present level of next to nothing to perhaps 2% by the end of the year. Also, and more importantly, we believe that the trend of declining long term interest rates that has occurred from the early 1980’s until recently is over and that long term rates will now start a multiyear slow progression higher. The ten-year treasury is currently yielding under 4%, by the end of 2010 we forecast that it will be above 4.5% and rising.

The Stock Market will be up single digits in 2010. More importantly, a much larger percentage of the rate of return from equities will come from dividends and distributions from corporations. Yes, we are predicting that the fragile US Economy will continue a slow recovery process during the year. Corporations will be able to report increased earnings over a rather bleak 2009. But the rate of growth will reflect the cautious progress the economy will be making. In an environment of increasing interest rates (which is a positive as it shows that the economy will be doing well enough to support higher rates) the price to earnings ratios will see some compression. This forecast is a year long one – and during the year we see the potential for the markets to trade in a 25% or greater range but finish the year with but a single digit total rate of return.

Commercial Real Estate will finally have hit its trough in the first half of the year. Residential Real Estate has shown some signs of stabilization. While it may be years before there is any meaningful appreciation in home prices, the worst of the decline could well be behind us. Commercial Real Estate on the other hand has not yet found its equilibrium. The banks have been extending loans and pretending they are not in trouble. They can do this because commercial property has something that residential properties do not – income. The banks do not want to be in the business of owning properties, but if they have to they will and take the rental income as their return and hold the properties long term to recover the money they lent. The problem in commercial real estate presently is the lack of deal flow to set the cap rate. Once the deal flow picks up, then the banks will have more confidence on what they can lend. After all, banks are indeed returning to conservative lending practices – at least until the next wave of greed hits in about 12 to 14 years from now!

And now the fun part – up onto my soapbox of personal opinion.

So many people that I talk with are angry at our government, and you can count me among them. Perhaps it comes from my common sense approach to investments – you know, don’t spend more than you make, save part of every dollar you make, and know what you own and why – that I would like to see more fiscal common sense in government. While I understand that Government has had to change and adapt over the years from the limited role the framers of the Constitution had envisioned, it has become too large. The tentacles of government and regulation reach into far too many facets of our lives. Each program looked at by itself may be well intentioned and have a morally attractive purpose, but in their aggregate there are too many. And we cannot afford to fund them all. Government is becoming too large a percentage of the GDP and cannot be supported by the non-government production. It has lead to a staggering debt load that, because of the nature of compounding, may strangle the country.  And if we are not careful, lead to the eventual fall of our government. While we have averted economic meltdown with an unprecedented infusion of liquidity, the price for the rescue effort has not truly been calculated, let alone begun to be repaid.

I believe there are only 5 ways to reduce the debt load on our country:

1. Default

2. Inflation

3. Economic/Governmental Reform

4. Sell Assets

5. Innovation and Growth

It is difficult to imagine the government reducing itself, but that is more likely than an outright default on the debt. And it is politically more likely to hyper-inflate out of the unsustainable debt than to default on it or voluntarily reduce the size of government. We certainly could inflate prices by marking our gold reserves to a higher price and selling them to reduce debt (It was done by Roosevelt to help cure deflation in the 30’s!). And could we privatize some governmental functions or properties? – Perhaps. Innovation and growth require education and optimism as well as a social environment that fosters middle class dreams and upward mobility. Attributes that are sorely lacking at present.

Simpler times are going to be the immediate future. These times could prove to be a blessing in disguise – serving to bring people together and to have appreciation for littler things in life. Less will be taken for granted, including having a job. Maybe we will return to the work ethic that made this country great – where there was not a sense of entitlement but rather the desire to earn a position and to work hard to keep it and advance. Of course my common sense mentality says we should have no welfare in this country – it should be workfare. If you get a check, you did some work for it – even if it is picking up trash, painting over graffiti or other community service. In addition I would support a lower flat tax for government that is mandated by the constitution and user fees for everything else that government has taken on that cannot be privatized. (It is fun to be up on the soapbox!)

The next decade will mark the passing of the baton from the baby boom generation to all those behind them. It will mark a real change in the mentality of how business is done. The factories the baby boomers relied on as employment and symbols of productivity are being replaced by smaller more productive Internet based businesses that spread the employment over vast geographic areas – yes even globally. The dream of upward mobility is still alive and well – but we have exported it to the rest of the world. Hence there will most likely be a regression to the mean of the standards of living around the world. The United States has enjoyed a tremendous standard of living relative to the rest of the world for decades – but that lead is fast evaporating and if we are not careful we will be surpassed, not because ours drops so much as the rest of the world has theirs increase. Going forward we need to be mindful of the worldview in our investment considerations. Education is a major concern that our country needs to address if we hope to compete on the world stage in the decades to come. While the rest of the world sends their young children to school year round and prepares them better, we are still stuck with an agrarian school calendar that gives our children summers off to farm! We need to have 21^st century approaches to our present and future realities.

As I take a step down from this virtual soapbox let me leave you with a positive thought if I may. Our country is still a place people will die to try and come to. We offer freedom and protect the rights of our citizens better than anywhere else in the world. I may disagree with many things and the way they are done, but I have the right to do so and that alone is something very special. I have confidence that we will emerge from this negative cycle we are in presently because the spirit of freedom and entrepreneurship that is part of the fabric of this country will not fail us. It may take a little longer than some hope it will, but we have already started down the road to recovery.

As always we welcome your comments and want to wish everyone a very Happy and Successful New Year.

Blake Todd

Portfolio Manager

The material herein has been obtained from various sources and is not guaranteed by us as to accuracy or authenticity. The opinions expressed herein are those of the financial advisor and do not necessarily reflect those of Crowell Weedon & CO., its managers and/or partners. Hubpages Inc. provides compensation for advertising from certain pages it maintains. The author of this Hubpage has agreed to give any advertising compensation directly from this Hubpage to charity