Insights on the Current Financial Markets Wednesday, December 23rd, 2009 After the Rally: What Happens Now? Tough Slogging in 2010 Anchor Capital 2010 and Beyond... Merry Christmas from the Leakes!

After the Rally: What Happens Now?

In our commentary last month we shared charts from 1937-1938, showing the high correlation to the 2007-2009 financial crisis and subsequent rally. Those charts inspired quite a bit of questions and feedback. [To review the commentary, click here.]

Most of the feedback was with regards to next year. What has happened in the past after the markets have suffered high velocity selling, followed by high velocity buying?

Both the Bull and Bear camps have lots of ammunition for their arguments. The Bears are warning of “The Next Shoe to Drop”, gravely concerned about the dual pain train of runaway inflation and a dismal outlook for Commercial Real Estate. The Bulls argue that earnings comparisons will be easy for at least another 2 quarters. The Bulls further argue that the average Bull market lasts 60 months, and we are a mere 9 months in.

Both have valid arguments. But I don’t agree with either. Here’s why.

2004 ReDux.

I hope you liked 2004, because we are about to see it all again- at least in the financial markets.

In order to illuminate my thesis, let’s rewind even farther back, to the early part of the decade. After the tech bubble burst in 2000, investors were treated to a high velocity, high drama decline of more than -45%. The Fed leapt into action, pouring liquidity and stimulus into the markets. It worked, and in 2003 investors were treated to a high velocity rally that retraced about half the market’s decline.

Here is a chart of both the high drama decline, followed by the spectacular 2003 rally, both fueled by liquidity.

The rally continued into the first weeks of 2004, but then failed. Starting in mid January 2004, S&P 500 Index spent the next 15 months making zero progress, by first declining -10% into August 2004, advancing slightly to a new recovery high in a year later in January 2005, then falling back to even in May 2005.

Here is a chart of the 15 months of much lower volatility accompanied by no progress in the index.

After spending 15 months consolidating the volatility, in May 2005 the S&P was finally able to resume the advance that began from the March 2003 lows.

Tough Slogging in 2010

Investors and managers who missed the 2003 advance piled into stocks in the first weeks of January, pushing prices higher. But volatility itself seeks extremes, often described “mean reverting”. In plain English, periods of high volatility are almost always followed by periods of relatively low volatility. It makes sense. Whether Bullish or Bearish, highly volatility markets are fast paced, emotional affairs. Decisions are made quickly, often based on little information. After a period, the fuel for activity is exhausted and markets settle to digest and diagnose what just transpired.

While the Bulls and the Bears are arguing over the next “massive” move for stocks, based on past market behavior I can make a strong case that they may both be wrong. I would not be surprised to see 2010 look much like 2004: a year filled with starts and stops, a frustrating environment for those still trying to recover the losses sustained in the melt down.

While probably frustrating for Asset Allocators and Buy-and-Hold investors, 2010 should be an ideal environment for Absolute Return and Long/Short Equity strategies, the foundation for Anchor Capital investment programs.

Anchor Capital 2010 and Beyond...

In the next week we will start to see all the “2009 in Review” types of reports and programs, where we look back at the year that was 2009. On the plane back from Portland last week I read the book "Street Fighters, The Last 72 Hours of Bear Sterns". That book was a startling reminder of what life was like in the stock market just 12 short months ago. From the brink of financial Armageddon to one of the most spectacular rallies of the last 50 years, 2009 has been quite a year to say the least.

For Anchor Capital, we have much to celebrate in 2009. This year we:

- Saw our assets under management more than double
- Successfully navigated one of the worst Bear markets of the last 100 years.
- Launched a very successful Hedge Fund (a private investment fund limited to Accredited Investors)
- Became a manager to one of the first few Multi-Manager Alternative Strategy Mutual Funds
- Had our White Paper published in the Market Technician’s Association’s Monthly Journal

It’s been quite a year, and we owe all of our success to you, our clients and partners. Without your trust and commitment to our process, we would be nowhere. We have much to share with you in 2010, including a move to a new custodian to improve our trading execution, availability of Anchor Capital programs to a broader audience, and more. 2010 is going to be an exciting year.

Merry Christmas from the Leakes!

For now though, the next week is a time to reflect on the year that was, and look to the year ahead. A time to pause a beat, and enjoy family, rest and celebrate the season of Christmas.

From my family to yours, Merry Christmas.

We'll see you in 2010!

Until next time,

Eric Leake
Chief Investment Officer,
Anchor Capital Management Group, Inc.
http://www.anchor-capital.com

Chief Executive Officer,
Anchor Research, LLC.
http://www.anchor-research.com

Anchor Capital Management Group, Inc., is a Securities and Exchange Commission Registered Investment Advisor. Opinions expressed are not to be construed as a solicitation to buy nor sell securities. *Anchor Capital utilizes a tiered fee schedule that offers lower management fees to accounts with higher balances. Any investment returns presented are calculated gross of fees utilizing actual accounts which represent a model strategy. Individual returns may vary substantially from those presented due to differences in the timing of contributions and withdrawals, account start dates, and actual fees paid. Past performance is not a guarantee or indication of future results. Presentation is for informational purposes only and no guarantee is made as to the accuracy of this information by Anchor Capital Management Group, Inc.