MARKET SENTIMENT as of 1/31/10

Only economists can see bad news within the good news we are getting!

Fourth quarter U.S. GDP was up a whopping 5.7% versus the fourth quarter of 2008, and earnings that we see being reported are generally falling within the expected range, with several companies surprising on the upside.  If this continues, we would expect the rest of the quarter to show slow yet positive growth.  We’ve seen a 3.7% decline in the S&P 500 Index in January, but we’ve been expecting some sort of decline in the general market after the exuberance we experienced in the last part of 2009.

The market is listening to labor and their woes – and Obama is on their side.

If the unemployment numbers continue to go up, this is bad news for the politicians, because all of their stimulus and job programs are money out the window.

If more jobs become available, and more people sign up for jobs, this will make the base for the employment figures higher, which will cause changes in the unemployment figures if these jobs are not permanent.

Does this mean that the employment market is going to cause negative ripples in the market even if the numbers get better?  How do we stimulate the economy by adding short term jobs, and increasing taxes on small businesses? Congress is wrestling with the increasing deficit, the introduction of jobs programs, and trying to figure out how to pay for it all.  We can hope that some common sense will percolate through from the public’s outcry into the houses of Congress, as our politicians wend their way through increasing spending bills and targeted taxation policies.

Some good news, at least for stabilization of the market, is that Chairman Bernanke has been reinstated in the job of Fed Chairman; no one can imagine any programs that might have had better effect on the markets that what he has done to date. 

Once the market improves a little bit, more people will be able to get in.
                      
The HRA measurement of market sentiment called the GOPF Index, a measure of where on the scale from Greed to Optimism to Pessimism to Fear that the market is trading, shows us that currently we are market neutral, meaning we’ve moved out of Fear, through Pessimism, but we certainly haven’t ventured into Optimism as yet.  The OU-P Factor, at -0.06, shows us that the market is currently fairly priced at this time.

The outlook for 2010 remains cautiously optimistic, as we see earnings continue to respond favorably through a recovery phase. We’ll keep an eye on various industry segments, as they tend to rotate in and out of favor, and try to ride some of those “waves” (short bull-markets within a “sideways” market) which occur even in a so-so market.

The one thing that HRA is worried about is the administration’s overt concern with redistribution of wealth, which makes accumulation of capital very difficult.
                                             
HRA wishes to repeat its recommendation that stocks are still a good Buy:  if you were  an aggressive investor in 2009, your stocks should have given you a very nice return, with constant supervision (our Favorite 30 picks, although a theoretical portfolio which doesn’t take into account trading costs, capital gains or dividends, showed an increase of 32.8% over the 12 month period).  Even if you have been a conservative investor, HRA has provided returns well over major banking institution certificates of deposit, under direct supervision. 

We recommend that all investors sit down with their investment counselor to develop policies that will guide them through the coming months of turbulence.

P.S.- Don’t forget that 2010 is an unusual year for personal income taxes, allowing Roth IRA Conversions for those who have higher incomes, and it is the last year of the Bush tax rollbacks on inheritance – in 2011, its’ anyone’s guess what the tax situation will be – so check with your advisor, and make sure that you check your retirement and estate plans for changes in these taxation rates!

Good Luck and Happy Investing!

January 31, 2010