Wednesday, March 18, 2009

Stock Market -- Position Overview

Our previous newsletter, dated February 14th, stated that the stock market remains fundamentally bearish, as Main Street has taken to hunkering down and saving rather quickly -- a determent to consumer spending and debt expansion. In past economic cycles, monetary policy worked by causing increases in borrowing, but that is not the case this time around, as systemic de-leveraging is the order of the day and will take years to evolve. We further stated that the stock market has discounted a normal recession, but we think this is anything but normal -- expect long-term lower prices. We anticipated the DOW, at least for the near term, to remain within a period of consolidation, and projected a trading range for the month between 7,700 and 9,000. The actual result saw the DOW resume the primary downtrend, producing a DOW trading range for the month between 7,033 and 8,315.

We anticipated that the US treasuries could decline in price, inversely causing yields to rise, and projected a US 10-year Note base-yield for the month of 3.05%. The actual result did see the US treasuries decline in price during the course of the month, producing a US 10-year Note yield range between 3.05% and 3.47%. We also stated that the excess supply of US treasuries, at least for the near-term, could cause the US dollar to decline in value, as foreign central banks may choose to hold less of these instruments and instead protect their own currency. We, therefore, anticipated that the US dollar could decline in value, and projected a euro fx equivalent trading range for the month between $1.27 and $1.33. The actual result was a slightly stronger and higher trading range for the US dollar, between euro fx equivalent of $1.2549 and $1.3030.