MONEYLETTER Hotline for March 11, 2009

It has been quite a week since our last Hotline. The expectations of a Chinese stimulus proved wrong, the February employment report was as bad as expected, the market just kept falling (hitting a new low on Monday), and then came Tuesday with a 6.4% rise for the S&P 500 in heavy volume. The great guessing game now on the Street is whether yesterday’s rally marks the end of the bear market or is one of the violent bull rallies that erupt every now and then in an ongoing bear market.

Nobody knows the answer. However, let us stick our neck out. We are impressed by the fact that that yesterday’s rally was triggered by real news, namely Citibank’s profit so far this year and General Electric’s successful trip to the bond market. This contrasts with many bear market rallies that seem to occur out of nowhere. We think the odds slightly favor the more optimistic view of the rally. We will know the answer shortly. If the rally has legs we should see one or two strong days for the market over the next week.

Meanwhile, there appears to be some progress in developing a final plan for the banking system. Treasury Secretary Geithner seems to be applying the same public-private solution for bank’s toxic assets that is about to be instituted for other asset-backed securities. It is the lack of a definite plan for bank toxic assets that is as important as anything else in driving the market down. This has been a very difficult stretch for everybody. We do believe that the next meaningful move for the market will be positive.

          There is no change in our recommended allocations

The Stock Market – Market observers have been wrestling with the issue of how to value the market now with earnings so impossible to predict. One thing to remember is that interest rates are extremely low. Consequently, historical multiples should be adjusted upward in considering the market’s value.   

 This column is submitted by Holliston native Brian Kelly on behalf of PRI Financial Advisors.