Monday Morning Musings

I read Warren Buffett's  annual letter this weekend and even "the oracle of Omaha" has not been able to dodge the worldwide contagion impacting financial markets. Looking forward he proffers that 3 out of 4 years will bring positive returns for stocks (just as through the observed history to date) and that he is enjoying "buying quality stocks at low prices".

I also heard an interview with Wharton School Professor Jeremy Siegel where he discussed the earnings of the market at present after adjusting for the negative performance of the large banks. He said the multiples are near all time lows once the adjustments are made. I was curious and looked back at an interview he did in early January where he predicted -7% 4th quarter GDP and -5% 1st quarter 09 GDP. As we now know, the recently revised 4th qt 08 GDP was -6.8%. Anyway, at that time he was looking for a +20% year in 09 for stocks . Let's hope that he is even half right.

So far, the financial markets have not signed on to the government sector expansion planned by the new administration. Markets know that there are but 3 methods for paying for these huge expenditures: grow/innovate our way out (unlikely given the disincentives in the tax policies); tax our way out ; inflate our way out. The market is guessing the latter two will carry most of the weight.

For perspective we are sending out to clients a chart showing the worst 3 year periods for the S&P 500 and subsequent returns. The 3 year timeframe ending in February ranks 35th worst . Of the 40 periods portrayed on the chart , the subsequent 3 year annualized returns were in double digits in 36 . The average 3 year returns were 19.56% per year.