WHM Capital Advisors

3rd Quarter 2009

 Client Report

Investment Commentary

By:       William H. McAfee, Jr.

President and Chief Investment Officer

Complete WHM Capital Advisors Composite Data is available by contacting the firm.

“How much better could it get?”

Although U.S. and global equity and bond markets have not improved to the point of a complete recovery from the financial crisis over the past 12 months, they are showing significant signs of improving confidence, making up better than half of the losses in the recovery that began in March.  Although many investors continue to be wary, for those who kept some exposure to the markets, the last six months have been highly rewarding.  As we recently observed, though, a loss of 50% takes a return of 100% to get back to even.  Thus investors may not feel quite as good about these gains since they follow significant trauma in the markets.

As an indication of the improved financial and economic conditions the U.S. Treasury yield curve has been steepening, as longer-term rates began to increase and shorter-term rates have stayed at the lowest point in history.  This trend indicates a series of expectations; that inflation is bound to be seen at some point as the low short-term rates and fiscal stimulus drive future economic growth; and that the spending patterns of the U.S. Federal government are seen as more risky for holders of Treasuries in the long-term.  One problem with the increasing longer-term yields is the potential for higher mortgage rates and a slowing of the housing recovery, since mortgage rates are typically tied to U.S. Treasury yields.

However, mortgage rates in the U.S. have stayed low and housing is still relatively cheap.  The beginnings of a housing recovery have clearly been helped by the $8000 tax credit for first-time home buyers.  As home inventories come down, the stabilizing price structure will help banks and the rest of the financial community feel some comfort with lending again, which will further help stimulate the economy.  The remaining concern which will likely drag these positive effects down is the issue of commercial real estate loans on bank books which have yet to reach a day of reckoning and commercial real estate developers have yet to see a positive turn in demand for their property and developments.

As an additional positive sign for the overall economy, corporate yields are also lowering and many corporate bonds, including financial company bonds are being upgraded to higher quality status by rating agencies.  Whether one agrees with the rating agencies or not at this point, the drop in rates required by bond holders is a good indication of investors’ willingness to put capital back into the markets.

Strong balance sheets at most large U.S. corporations are helping the improving outlook on stock and bond markets.  As we have discussed over the last 2 years, the average company in the S&P 500 has a significant amount of capital and cash to weather a recession and/or grow in a turnaround.  As investors have realized this over the last 6 months, equity and bond prices for these companies have improved accordingly.  Smaller companies that do not have the same capital strength and that are dependant on bank credit markets are not likely to have as easy a turnaround, even in a post-recessionary environment.

With the strong rebound in capital market outlook over the last 6 months, we expect that we may see some short term downward pressure because of buyer fatigue.  This current bull market posted the strongest quarterly gain in the 3rd Quarter since 1998 (which, interestingly, was also an extremely volatile year yet one where the gains were historically large).

There are still large amounts of cash not invested in markets. And as consumer attitudes improve more of this cash is likely to return to market investments, although U.S. demographics are likely to produce a more conservative investor community given the losses sustained by the baby-boomer age group in their retirement accounts.  As another rebounding statistic, U.S. consumers, who decreased holiday spending by 28% in 2008, are likely to spend more this holiday season leading to improved earnings for most U.S. companies.  Companies in the S&P 500 have an average of 40% of all revenues outside U.S. meaning that improvement in earnings will also occur as global economy strengthens and providing some hedge on the future of the U.S. economy.

International markets are clearly improved and weakness in the U.S. Dollar has magnified the benefits of overseas investing.  While dollar weakness has had moderate impact on commodity prices, the risk of future dollar decline will increase as U.S. government spending is seen as an increasing risk.  This is likely to have some additional upward pressure on commodity prices in the near-term and act as an inflation stimulus. 

The 3rd Quarter brought better than expected gains in U.S. equity names like Apple (AAPL, NASDAQ), Walgreens (WAG, NYSE) and Chubb (CB, NYSE) as well as foreign currency and emerging markets holdings.  In fixed income, portfolios benefited greatly from the previously mentioned confidence that returned to markets as risks abated.

WHM Capital Advisors is a financial advisory firm providing research, analysis and advice to a diversified global client base that includes institutions, corporations and high net worth individuals. Founded in 2002, the firm’s areas of expertise are in valuation consulting, succession planning, mergers and acquisitions advice and investment management.  In addition, the firm has a related technology company that designs applications to analyze complex financial issues for clients.

Contact:         William McAfee, Chief Investment Officer

                       1310 Lady St., The Keenan Bldg., Suite 800

                       P.O. Box 7426, Columbia, SC 29202

1-877-269-5342

(c) WHM Capital Advisors

www.whmca.com