SAC's commentaries are sought after by investment professionals and clients alike for their timely insight into the strengths, weaknesses, and future direction of the market.

First Quarter 2010

A LOST DECADE WHILE THE ECONOMY REMAINS ADRIFT IN A SEA OF UNCERTAINTY WITH DEFLATIONARY HEADWINDS

The U.S. economy is struggling to emerge from the Great Recession, but the recovery path remains strewn with obstacles. If we accept, as does the consensus of economists, that the trough was reached sometime during the summer, the initial stage of the recovery has fallen far short of past cyclical standards. Third-quarter growth, initially estimated at a respectable 3.5 percent, has since been revised down twice, with the final reading of 2.2 percent a more accurate reflection of the tepid launch to the upturn. More to the point is that virtually the entire gain has been powered by massive government intervention to jump-start auto and home sales. The balance can be attributable to a slower pace of inventory depletion, as stockpiles have already been reduced to bare-bones levels in the face of weak demand prospects.

The government retained a heavy hand in the fourth quarter, extending the homebuyers tax credit for example, which is sustaining household sales activity by borrowing from future sales. However, consumers and businesses are hardly in an expansive mode. Households are focused on repairing damaged balance sheets which have been decimated by a housing collapse and bear market in stocks that wiped out some $12 trillion in net worth, despite the rally in equities over the past nine months. The bear-market rally helped lift confidence off of the rock-bottom levels reached early in the year, but will do little to boost consumer spending in the face of a weak job market, stagnant incomes and personal finances that remain overloaded with debt and deficient in savings. Meanwhile, businesses are stuck with an enormous amount of excess capacity and gripped with uncertainty over demand prospects, which precludes any major thrust from investment spending.

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2009