Value Library

The following is an excerpt from the ABC Perspective - July 2010 - Pg. 1

Progress

The present slow and erratic pace of the economic recovery from its 2008-2009 lows is frustrating economists, investors and politicians. It had been assumed that with the significant monetary and fiscal stimulation over the past 18 months the U.S. economy would have shown far greater economic vibrancy than the estimated +2.7% Q1 2010 GDP growth rate. This statistic was especially disappointing when compared to the previous quarter’s expansion of +5.6%. As a result, there are an increasing number of concerned investors who are now becoming more and more fearful of a “double dip” U.S. economic recession.

This swelling negativity, furthermore, was clearly evidenced by the extraordinarily poor combined May and June North American equity performance which showed total declines of -7.5% (TSX), -11.2% (Dow Jones 30) and -14.3% (Nasdaq). But let’s put the worldwide 2009-2010 economic recovery in perspective by re-examining the financial and economic events of 2008-2009.

In rolling back the clock to those discouraging days, the global community appeared to be facing the worst economic contraction since the 1929-1933 depression. Major bank and investment dealer failures, a virtual real estate collapse, automobile manufacturers on the verge of bankruptcy combined with extraordinary expanding fears appeared to be setting up our planet for a complete cessation of economic and financial activity. Fortunately, with massive concerted international monetary and fiscal stimulation the world has been able to dodge the unthinkable economic collapse which appeared inevitable only 15 months earlier. But this is not to belittle the formidable challenges that lie ahead. The point is that the world is anxiously awaiting tangible evidence of a sustained economic recovery without the necessary governmental assistance.

Admittedly, the road toward a self-sustaining global recovery is long and tedious. In fact, more financial healing and repair will be needed over the next 12-24 months. Nonetheless, the world is making economic progress no matter how slow the pace; many of the positive strides are masked by well-publicized debt problems of Greece, et al, Gulf of Mexico oil spill, etc. Moreover, considering the unusually deep 2008-2009 recession which resulted in unforeseen wealth destruction, bankruptcies, and reorganizations we are naturally most eager and impatient to see a return to pre-recession conditions. Unfortunately, the balance sheets of corporations, consumers and governments will have to be rebuilt. In the meantime we will have to weather the incessant financial market volatility as confidence is gradually restored.

In summation, although we are not in the double dip recession camp, we expect the balance of 2010 to test our more optimistic conviction and economic outlook. Furthermore, despite the present trying financial circumstances we anticipate excellent buying and trading opportunities, more mergers and acquisitions, rising dividend payouts and increased corporate share buy backs. In a nutshell, we are heartened by the present economic progress . . . no matter how slow the pace.

Irwin A. Michael, CFA