In April of 2010 I wrote in my quarterly report that I thought the S&P 500 Index
would return to 1270 by the end of 2010. This 1270 number on the index was the level
the market was at the day before the Lehman Brothers collapse occurred. My thinking
was that a crisis was avoided and that the market would reprice itself back to this level.
My father, who was an economist for the government, taught me in my very early youth
that interest rates and earnings drive stock prices. Or to put in simple terms when interest
rates are low and earnings are growing the market historically trends higher. In the first quarter of this year it was clear that interest rates would remain low. The second part of this equation or the earnings question seemed to be the surprising factor for 2010. From
Whole Foods to Apple and Norfolk Southern Railroad earnings, estimates across most market areas were exceeded through out 2010. What’s interesting is that many high
quality companies like Intel and Johnson and Johnson have not participated in this two year market cycle. A spread of the money or market breadth from the high flyers like Netflicks and Priceline into the aforementioned names would be a very positive sign for the market. Narrowing market breadth and very high bullish sentiment can be signs of a topping out process. Thus those shareholders, who were paid to wait via a dividend, may have a better year in 2011. Heading into 2011 the usual macro headline risks remain high unemployment, rising deficits, and a fading housing market; which means the market is certainly not immune to corrections. Thank you for your patronage and I will work hard to continue to earn your trust.