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Right after Thanksgiving last year, I sat at lunch with a client. We were in the midst of another hefty fall in stock prices after a market advance off last summer's crash failed at the 200 day moving average. The financial press was mostly gloom and doom. High unemployment, another bad housing report, pre Christmas retail sales in doubt etc. But I was noticing that many equities held in our discretionary balanced portolios were not participating in the downdraft. I told the client: "the market feels like it wants to go higher". This analysis appears to have been correct, with an advance of about 12% since then. It's not just US common stocks that have been robust, but our extensive holdings of preferred stocks have enjoyed an even greater rally. Most of these are issued by financial institutions, including some in Europe. An apparent willingness of powers there to adopt some of the U.S.'s actions of three years ago, have calmed debt markets somewhat. Since that early November luncheon, we have seen encouraging reports on retail sales, manufacturing activity and unemployment. Anecdotally, I've heard from a variety of friends in disparate industries that "things are better-not booming, but better." I sat next to a finish carpenter watching the Superbowl brawl on Sunday and he cheerily shared that he had just found a job after two years collecting unemployment. At the same time, I've encountered a number of people who have been fortunate to accumulate money and now want it to work better for them (AKA: "Investors"). They are desperate for yield, disgusted with earning virtually nothing on money market funds and next-to-nothing on certificates of deposit. Some have thrown money into annuities, earning yields of 1.75% to 8% only to discover these are teaser rates that will disappear after their first year. Unfortunately, early withdrawal penalties on these insurance company issued annuities do not go away so quickly-some have penalty periods extending 8 years! One I saw recently had a 20 year penalty period, a new low in terms of abusing the elderly, in my opinion. It seems there is a simmering demand for returns and an improving economy. This is a possible formula for a "Market Meltup", that is, investors throwing cash into stocks and bonds in order to secure good dividends and interest yields. In fact, it's already happening-yields on bonds from Treasuries to Junk have plummeted. Yield spread on corporates to Treasuries have been steadily tightening, that is, investors show a willingness to accept a smaller premium for taking the theoretically higher risk of owning a bond issued by a corporate guarantor rather than by the US government. Will we see stocks explode higher this year? For the first time in many many years, my bones feel as if this could happen. As individual stocks on our watch list have stood up and shouted "buy me!", we have been steadily putting client cash to work, becoming more committed to high quality common stock. Meltup or no, I feel our collection of high quality businesses and continued commitment to fixed income holdings will provide a balanced growth experience for clients over a longer time period.
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