In our March 2008 client letter, we stated:

“In spite of all the difficult times, our economy has always cycled back to prosperity.  Economic cycles, such as our current slowdown are the inevitable and natural result of a free economic system.  Without the ebb and flow of commerce, there would be no opportunity for successful investing.  Our Delta accounts are well positioned to take advantage of what we believe could be a time of very favorable upscale opportunity.”  That was 3 years ago…

So… what has actually happened?  Well the good news is the markets have indeed cycled back and doubled from where they were in 2008.  The only other times in our market history when we have seen a run this substantial and this quick was once in 1937 and once in 1939.

So… where do we go from here?  We believe, we will trade higher in a longer-term sense.  But, discretion being the better part of valor, we feel it may be time to take a few chips off the table in the short-term.  The economy is showing signs of recovery and it appears that job creation has begun.  That said, we are seeing a few short-term headwinds emerge: 

Oil and food prices are on the rise raising the specter of inflation.  Raising inflation, of course, is something which could act as a catalyst for slower consumer spending and mire the economy.

Interest rates are rising which is bad news for bond holders.  If they continue on their current path, it could also represent another drag on business and consumers.  Understand in this context, rates are moving higher from historically low levels. Thus, we are not overly concerned in a long-term sense.  Higher rates will also further dampen any recovery in housing.

Our expectations at this time, point to a market which will soon start a corrective phase.  We remain bullish longer-term and think the next couple of years will be good ones in the markets. 

However, if inflation heats up and interest rates continue substantially higher, they will come to public light sooner rather than later, and will almost certainly act as the driver for a short-term correction.  As a result, we my start taking some profit and raising cash.

We were very pleased with our 2010 year-end account performances and are thankful for the opportunity to serve you.  Additional, we are thankful for the many expressions of appreciation received from our clients.   In both our conservative (income) and aggressive (growth) portfolios, we exceeded our benchmarks in most cases in spite of a challenging and hostile economic environment.   

 As we now look forward to a new year, our team is again poised to deliver both solid results and excellent service to our clients.  To that end, we always welcome the opportunity to assist you with any financial planning or investment questions you may have.  Please do not hesitate to use us as your professional resource.

 We thought it may be helpful with this month’s letter to provide some insight in answering some of the most asked questions we are getting from our clients to wit:

 1.     Will we finally see a “real” economic recovery?

Yes… what has made us so much more optimistic?  The biggest positive has been a sharp improvement in the economic data.  The change in real GDP appears to be on track for about a 5% (annualized) pace in the fourth quarter of 2010.  If it holds, it will be the best organic growth pace since at least 2006.

 2.     Will the housing market see meaningfully recovery?

No… in fact the housing market is the only major sector of the economy where the news is not getting better.  Actually, it has actually trended worse.  The primary reason for this is the still-large excess supply, as only about one-third of the distressed residential properties have been unwound and absorbed.

 3.     Will the trade deficit shrink substantially?

No… while the deficit is likely to narrow a bit, a meaningful improvement is unlikely.  While an improving economy will help, we don’t expect a significant drawdown until 2012 or 2013.

 4.     Will the unemployment rate fall?

Yes… but not to levels anywhere near historic “Full Employment” numbers in the 4-5% range.  However, the relationship ratio between changes in real GDP and changes in the unemployment rate remains as close as it has ever been which should translate into higher growth and thus higher employment.

 5.     Will interest rates continue higher?

Yes… we expect a moderate increase.  The domestic above-trend growth coupled with strong momentum in the emerging world should outweigh decline in core inflation and translate into gradual increase of interest rates.

 6.     Will state and local budget crisis derail recovery?

No… while this problem is unlikely to get better quickly, the gathering pace of the recovery should support the continuing rise of state and local taxes.

 So… as the journey continues into 2011, please accept our best wishes for a prosperous and healthy New Year.

As we anticipated, the markets emerged from their summer lull with an impressive fall run.  While we still have substantial economic headwinds to work through, it appears that the summer slowdown may have been a correction in an otherwise more positive macro-trend.

 In a longer-term sense, we are guardedly optimistic for the potential of the capital markets.  From a “bigger picture” view, we see several positives as we extrapolate the data:

 Businesses are producing about the same GDP as in 2007.  Currently, this is being achieved with 7.5 million fewer jobs, which obviously reduces production expenses.  If growth is sustained, some level of additional hiring will also come into the equation.

 Corporate profit margins have recovered to levels seen only in a couple of previous expansions.

 Markets have experienced a good solid rally.  In fact, a majority of the S&P 500 stocks are trading at 52-week highs.

 With our market view tilting to the positive, we are turning our attention to finding the next level of market leaders we can invest in or rotate into.  One of the areas we are getting excited about is the financial sector.  With financials making up 40% of the S&P 500 index, it’s our position that the markets cannot push higher in coming years without financials re-taking a dominant leadership role.  Further, it is a sector in which we are beginning to get more earnings clarity.  In the real short-term, the markets are overbought and may correct to start 2011.  That said, if they correct “nicely” we will more than likely establish positions in this group.

 With another year about to enter the history books, we extend our best to you and your loved ones.