The stock market saw huge gains in March after a brutal 8-10 weeks to start the year.

There have indeed been a few signs that things have turned a corner.  As of April 13, 2009 the market believed things would only get better.  You are most likely feeling better, just as I feel a little better.  And it is healthy to feel better right now as it now appears that a depression has been avoided, as has a full blown meltdown of the financial system.

But the crucially important point is “SO WHAT?!” So we’re feeling better. Does it make sense to change investment posture just because we FEEL better? Do we want to put more money in stocks NOW? Our guess is that some of you are FEELING that way.

We’re not proud of it, but we confess to having feelings too. As such, we are tempted to ramp up equity exposure right now due to the fear that we will be left behind.  But what we believe is that data are worth a lot more than feelings. Let’s look at some general data.

White House Economic Advisor, Larry Summers says the period of "free fall" will end soon. But he warns that even after the worst of the downturn is over, staggering job losses are likely to continue. Fed Chair Bernanke said this morning that there are “signs that the pace of the economy’s decline may be slowing.” But both men say that the decline continues.

Producer Prices and Retail Sales figures on April 14^th, 2009 were both reported lower indicating no inflation and contracting demand. Our conclusion is that while stocks have rallied off a tortuous low in March, the operating environment for most public companies continues to remain very challenging. 

Banks have gained some stability from a significant amount of government money as well as one time mortgage refinancing and a good trading environment, but most analysts believe that many of the banks are far from out of trouble (most financials have run up too far way too fast). Bank of America analyst Guy Moszkowski, while discussing Citigroup this morning, voiced the frustration of all analysts who are trying to understand the earnings of banks: "there are so many special items that there's very little agreement on what to exclude, what to include, and whether there is any glimmer of sustainable earnings power or capital accumulation."

Home prices continue to fall, and foreclosures continue to rise. Credit losses on mortgage, home equity, credit card, auto, student loans, commercial real estate and other business loans are heading higher at an uncomfortable pace. So we remain cautious, and will buy when valuations are more compelling.  Most clients are underweighted in equities already; if this were not the case, we would be reducing equity exposure at these levels.

In successful investing, discipline trumps emotion.

This rally might quickly take us to 9,000 (900 to 950 on the SP 500), or it may fade back to the low 7,000’s over the coming weeks. If the rally continues without pause to the 9000 level, it could very possibly make a higher low during the summer-fall around 7,000 (750 on the SP 500). We can easily argue several reasonable outcomes based on yesterday’s close, but so what? Arguments are no substitute for research, and while price momentum can be mercurial, balance sheets and earnings will ultimately decide the appropriate price for stocks.

Uncertainty is your safest and most reliable investment companion. Uncertainty is the only thing which you can reliably trust. Although feelings of certainty in investing may produce significant gains if timing is right on, such feelings are always dangerous.

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