Exiting 2009 we collectively breathe a sigh of relief and look to the future and the new normal. Our initial outlook for the market and economy remains favorable. The easy money policies of the Federal Reserve should continue to provide the stimulant this recovery has become so reliant upon. Through the first half of 2010 corporate earnings should continue to surprise to the upside. We should see a resumption to job creation in the first quarter perhaps as soon as February. I anticipate the Obama administration rhetoric to make a Clinton-esque type shift emphasis towards cost cutting and balancing the ballooning budget deficits and away from entitlement programs and tax hikes. This shift should restore confidence in the severely weakened dollar.



While risks remain, and I’ll share a few later on, with the economy continuing to heal, real estate on the mend and the fob front improving by the week, the surprise in my opinion may be the strength of the recovery and market advance. With that said GSA looks for the overall market to advance unevenly throughout the year and sets a year end target of 1250-1300 on the S&P 500. We gather our target by looking at S&P 500 earnings of $78.00. Based upon benign inflation and expectations for Fed Funds rates to remain in a range of 0-2% we utilize a 16-17 market multiple. This target may be breached before year end and a revisit may be necessary to either adjust strategy or raise targets based on the conditions that portended the breach. We look for domestic growth to be within the consensus range of 2 ½ - 3%. The surprise here may be to the upside as corporate spending picks up materially and follows the return of consumer consumption. This moderate growth projection would work to the benefit of the Federal Reserve as they begin the arduous process of extracting excessive stimuli.



Canaries in the coal mines: We’ll keep an eye on the Automobile industry and Homebuilders. Government incentive programs, Cash for Clunkers and New Home Buyers tax credits have expired or about to. The argument has been made that all Cash for Clunkers did was pull forward future car purchases from 2010 into 2009 to take advantage of the tax credit. I didn’t believe it then and don’t believe it now. However, should they prove me wrong and another big drop off in auto sales does occur it would solidify the bear case and allow the argument for a weak consumer reemerge. The same must be monitored when the home buyers’ tax credit expires this year. While the tax credit may have pushed some folks off the fence, homebuyers were/are taking advantage of exceptionally low mortgage rates and the affordability index in very favorable territory. Mortgage rates will rise perhaps a full percentage point once the Federal Reserve allows its Mortgage Purchase plan to run off later this year. So, again we would anticipate home sales to remain robust as the rush to take advantage of the current environment allows for the excessive supply of homes to be taken down to a more manageable level.



A brief review of economic releases shows the Conference Board LEI up .9% in November for the eight straight increase. Following a .03 and 1.2% increase in October and September. Industrial Production rose .08% in November for the fourth time in five months. Importantly Capacity Utilization rose .07% to 71.3%. Keeping in mind with the US economy operating at 3-4% annualized GDP Cap U would normally be closer to 81%, this leaves plenty of room for expansion without triggering a bout of hyper-inflation. Along with unemployment running just north of 10%, wage pressures should remain well constrained. These two combined gives us comfort and confidence that the Federal Reserve should have some time to execute their plan.



As we enter earnings season we anticipate analysts were too pessimistic with their corporate revenue, earnings along with the consumer to revert back to his spending habits.



Risks: Obviously many. As we exit recessions there arise as many questions as answers. While the trend is early, it clearly favors one of healing and modest growth at a minimum. But, the recovery and flow of information is fluid and uneven at best. Here are a few hot spots, not in any order of significance.



China: The China economy stumbles and growth under impresses. Unlikely as the Central bank just raised interest rates to tamp down growth.



Federal Reserve/Treasury; The Federal Reserve and Treasury misread the strength of the economy and remove stimuli to early. In the need to fend off a double dip they reinstate extraordinary programs and a second stimulus program is instituted further ballooning the level of US debt.



Commercial Real Estate: the CRE market follows the path of sub prime and residential real estate and experiences a collapse of demand and rates.



Commodities: Should a super spike on improving demand and global economic recovery occur, it would have the ability to choke off a fragile economic expansion.



Geopolitical: Not enough room to list them all, so I’ll start with the 800 pound gorilla. Iran. We’ll all be watching, the silence has been deafening, as the potential for Israel to strike Iran’s nuclear facilities may reignite the fuse in the Middle East conflict.



Financials: A major bank crumbles under the weight of risky investments and is allowed to fail testing the new regulators powers to dismember a financial institution.



While there clearly remain high profile risks, the evidence of a Domestic and global recovery continues to mount. We’ll continue to monitor economic releases, geopolitical tensions and regulatory risks for any alterations to our outlook, projections and strategy. As we enter earnings season we anticipate analysts were too pessimistic with their estimates for corporate revenues, earnings and the willingness of the US consumer to part with his greenbacks if THE PRICE IS RIGHT!



Yours in pursuit of the Kwan!