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TO SUMMARIZE OUR THOUGHTS 12/31/2009
The ebb and flow of short-term data has produced a powerful market advance even though dangerous long-term cross currents exist.
The enthusiasm with which investors chased prevailing trends without
regard for longer-term risks is what brought about the series of
bubbles during the last decade – the tech bubble, real estate
bubble, commodities bubble – abetted by government ineptitude and
a social welfare agenda.
There is considerable uncertainty about how the economy and markets
will play out over the coming year and beyond as the government’s
role in the recovery is reduced. The specter of inflation, rising
commodity prices, rising interest rates, and rising taxes will all be
headwinds that will dampen the speed and strength of the current
recovery.
The government response to the current financial crisis has been to
spend trillions of dollars, formulate new programs, increase social
services, and become a private sector shareholder. Over an
extended period of time, no economy can do well if the government is
overspending, over regulating and creating money out of thin air.
In the short-run, however, flawed long-term policies can produce a
positive short-term effect.
Over the last 70 years, dividends have contributed over 50% of the
total return for equities. In addition, companies with lower valuations
have historically outperformed over complete market cycles. Our
tools to combat knee-jerk reactions to prevailing trends are
time-tested principles of asset allocation, diversification,
rebalancing, and patience.
In this climate, our focus will continue to be lower P/E, higher
dividend paying companies that use only appropriate levels of debt
financing.
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