Quarterly Letter to Clients Part IV

What if things are getting better? We believe that investors have ignored the possibility that things could get better. Here are a few things to consider:

The economy: Economic data has been getting better. 4th Quarter GDP for instance came in at just under 3% {although the higher inventories imbedded in that number are a concern}. Many other measures of economic growth have also flashed positive signs in the past three months. Improved housing data, improved unemployment claims and some of the best auto sales in nearly four years point towards an economy that is growing. That growth undoubtedly is not as high nor growing as rapidly as most would like to see. But given the headwinds we have faced and continue to face, it is perhaps as good as we are going to see at this point of the cycle. I think it is possible that we will be surprised by how strong economic growth has been by this time next year. Also, corporate balance sheets are in excellent condition. S&P 500 companies likely grew their earnings by nearly 17% in 2011.

Europe & China: The European situation seems to be improving. The massive low cost funding coming from the European Central Banks, a more technocratic government in Italy and more a conciliatory tone from the Germans seems for now to have stabilized that situation in regards to Italy and Spain. Greece remains a problem but the main issue seems to be containing the crisis to Greece and so far that seems to be working. Recent data out of China supports the fact that the Chinese may have engineered a soft landing for their economy, a precursor to stronger growth there in 2012.

An accommodative Federal Reserve: The Federal Reserve signaled this week that it will keep interest rates virtually at zero through 2014. This is positive for several reasons. First a lower cost of money is often seen as economic stimulus. Lower interest rates makes stocks more attractive on a risk basis as well. The nearly two trillion dollars sitting in money markets or bank deposits earning essentially nothing might be persuaded to begin looking for higher returns if rates stay this low. That two trillion could be a powder keg ready to ignite stocks if things break the right way.

*Long ETFs related to the S&P 500 in client and personal accounts.