What an incredible year. The U.S. equity markets have provided us with one of the largest rebound in history after hitting bottom earlier in March of this year. The S&P 500 was up 26.46% for 2009, the Dow Jones Industrial Average was up 22.68% and The Barclay Aggregate Bond index was up 5.93%.

About a year ago, the consensus was that the worst was behind us. Little did we know what would happen next with the market decline that followed. The gurus of the hour have come out only to see their day in the spotlight short lived. They could have hardly foreseen what would happen after March when the market recovered in an almost unprecedented way. The convictions that led them to their doom and gloom predictions would not have permitted them to change their tune so quickly. Many investors have gotten out at the point of maximum fear. They missed a crucial part of the rally that would have allowed them to recover a significant portion of their losses. It happens to the average investor time and time again when emotions take over. The fact is that the market participants create this market activity. This creates a redistribution of wealth, from the short term players to the disciplined long term investors who understand that investing is a lifetime endeavor. Our observation of investor behavior over the years is that their current outlook at a moment in time is an extrapolation of their most recent experiences. In the short term, there is almost always a failure to recognize that at some point things will change course. Trends do not continue indefinitely in one direction, be it positive or negative. One simply has to set their expectations based on looking at the big picture, not the flavor of the moment.

On the economic front, evidence continues to accumulate in support of a global recovery. The recovery is likely to remain fragile a little while longer. Economic growth was slower than previously believed. Real GDP was revised down to 2.2% annual from the 3.5% originally reported. The economic growth has been primarily driven by fiscal stimulus actions rather than private sector activities. Retail sales were up slightly. The evidence of stabilization in the job market is encouraging but by no means signifies that we will see notable improvements there for a while longer. New home sales rose in October for the first time in three months. Given how far we have fallen, and the presence of considerable stimulus, we should see decent GDP growth in 2010. As things improve and the private sector gets more involved, the job demand should improve, which will increase consumer demand and a positive feedback loop could ensue. Factoring overseas growth, things may turn out alright next year. On the not so good front, we have seen debt levels rise to concerning levels, the commercial real estate market is very weak and more of what Washington wisdom has to offer could come down the pipe and hinder growth. The Fed is keeping interest rates low for the foreseeable future. The objective is to make it extremely painful to remain in cash and entice investors out of short term cash instruments into higher-risk investments. Despite talks about new paradigms and trying to reshape conventional wisdom, a textbook market recovery is underway.

The best time to own stocks is usually before the end of a recession, not after it has become obvious that the economy is out of the woods. This makes sense if one considers that reward should be commensurate with the risk involved. There are many skeptics with regard to this stock market rally. Doubt is a good thing in our view. When we get to a place where everyone no longer has doubts about the quality of the rally and investors commit to that belief, then we are probably closer to a top. The news does not have to be good to support a rally, it simply needs to exceed the expectations. The bar was pretty low with regard to expectations when everyone factored in a worst-case scenario. The S&P 500 is still down 29% from its peak. Traditional valuation measures such as price-to-earnings and price-to-book values are roughly half their levels of ten years ago. The market capitalization of the S&P 500 is down to about 80% of GDP, which is about half of what it was then. We do not want to sugar coat it either. We realize that things have moved pretty quickly and the appetite for riskier equities has been apparent from the relative performance of the lower quality issues. The more speculative character of this market should not be ignored.

The course of action is unchanged. One should buy or stay invested when others are fearful and valuations are attractive, stay diversified and stick to the discipline of a sound investment program. One should not follow the herd and certainly should avoid paying attention to the forecasters. Their explanation of the circumstances might be impressive but they will play with your emotions. Their tales are always based on what has happened but more importantly what will grab your attention. They do not have a crystal ball. No one does. If anything, 2009 proved that.

We hope that you have enjoyed a wonderful holiday season and that this new year brings you much happiness and prosperity, all in good health. We are thankful for the opportunity to serve you.