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As 2009 draws to a close, we can all agree that it has been a wild ride, in the markets, politically, world-event-wise and even in the sports world. We have seen wonderful successes and recoveries and continued despair and tragic ends to careers, lives and successful runs. So, as I reflect on how we began this year, flush with fear and now how we conclude it, with tempered optimism, I will try to lay out what I think will be some trends in 2010.

I will divide my comments into three sections. I will begin with Economics and Markets, continue with Politics (yes) and conclude with my general recommendations for clients and others. So, without further ado, I open my commentary.

ECONOMICS AND MARKETS

I recently read in Barrons that we find ourselves with an economy on crutches and a stock market on steroids. Whereas this might be a bit comical in nature, I think its probably true. The biggest question facing investors as we enter a new year and decade is whether this market can sustain itself in any shape or form. Or more aptly, how far ahead of themselves did the markets get? Since March 9, the Dow has moved from about 6,400 to its present 10, 500 or not that far from doubling in value. Even in good times, this is darn good. However, we are nowhere near good times, so I have to conclude that like last years presidential election, this rally is based mostly on hope for change. And, one year into the new administrations watch, I dont really think we have too much of the hope for change that was broadcast. Such as I fear it may be for the markets. In other words, in March, the markets decided that they wanted hope for change, moved ahead dramatically and are now in pause mode. Can companies really deliver on growing earnings and sales? Is the recession really over? Will unemployment really start to come down soon? What will any health care bill mean for the economy?

With so much optimism last November, it was bound to happen that the Administration would disappoint. Poll numbers suggest that this is happening in a big way. So, the question is, are the markets going to follow a similar pattern? I think it is quite possible, if not probable. Granted, much of the $787 Billion dollar stimulus plan money will begin entering the economy in 2010, but other headwinds will offset this I believe. One of the first issues is that in spite of what experts say, the recession is still alive and well in most of America. There are still more foreclosures to come and short sales. These folks have already begun to rein in spending and will continue to do so. Other folks have not seen mortgages reset yet and when they do, and if they are higher, more problems will occur. In many previous booming housing markets (Arizona, Nevada, Florida), the markets remain terrible, although some glimmers of hope have begun to surface. Prices remain under pressure, and it takes longer to sell a home and if you try, your competition is bank inventory or neighbors in deep financial do-do (dont know if that is an official finance term yet).

Time magazines Man of the Year, Ben Bernanke, and his crew at the Federal Reserve are concerned about inflation and when they see any evidence that inflation is on the horizon, they will act. My guess is that they will either be much too soon or much too late. In any event, look for rates to continue their slow upward drift in 2010 and dont be surprised to see a Fed meeting that evokes a sudden increase in rates. This would be unsettling for markets, but by then, it would be too late. In any event, count on the Fed to get it wrong. This would be a headwind.

In just about a year, the last remembrances of George Bush will disappear along with the tax cuts enacted in 2001. Dont look for any extension in the cuts at the very least and certainly increases in tax rates can be expected and dont rule out retroactivity in the language. We are also reading about estate tax potential changes, but nothing in concrete. It seems as though there will be some sort of limit, not too dissimilar from the current $3.5MM per person and a rate somewhere near 45%. However, in the interim, planning will be difficult and should be flexible. I continue to remind clients to keep estate planning documents current and a measure of their estates updated to keep them apprised of what planning needs to be done. If the documents are up to date and they may not be subject to estate taxes, the main concern is distribution to whom and how much and how.

POLITICS

As all have heard, the Senate passed its version of the health care bill on Christmas Eve. The next task is for the House and Senate to merge their versions into one bill. This will be no easy or quick task, but it is expected that something will result from this year-long process. The question becomes just who will this legislation benefit? In a rather ironic twist, it appears that health care and insurance costs for many middle income taxpayers will increase over the next few years, while the benefits wont. This would seem to run counter to what the President promised during and after the campaign. In fact, many polls suggest that the majority of Americans are not surprisingly against this particular bill. Yes, most citizens want health care reform, just not the kind which is offered in this bill. Expect this to play out over the next two months with something passed. Then, as campaigns shift into overdrive for the 2010 mid-term elections, the two parties will spin the legislation many ways to benefit their candidates.

It is normal for the majority party to lose seats in the first midterm election since a Presidential Election, but this year could be slightly different, depending on who wins the spin game in 2010. I believe it is possible for the Democrats to lose 6 or more Senate seats and perhaps up to 40 House seats, which would all but freeze any additional legislative agenda for this President for the remainder of his first term. Again, the stimulus bill was quite unpopular and has not yet proved to be working and the health care bill imposes taxes and fees well before any benefits are realized. So, there may be many discouraged voters come November 2010. The voting bloc to keep an eye on is the Independents. Their numbers are ever increasing and their support of this President is waning. How they vote will shape the next Congress.

RECOMMENDATIONS

2010 is not shaping up to be a great year, although it might end up being a good year. The wild cards are how high and fast interest rates will rise, how much housing improves and how much more lending banks will do with small businesses and individuals. In addition, unemployment will remain high and only toward the end of the year, begin to fall, in my opinion.

With these headwinds in mind, investors should be taking the pain of short term interest rates while awaiting higher returns in the future. However, the future is not here yet and those paltry rates of return will be in force for some time. Dont reach for extraordinary yield unless you know what you are doing, or the person managing your money knows what they are doing. Equities should do OK, although as I indicated, the bar is set high and companies risk not meeting their goals and therefore, disappointing investors. Dividends may start to rise again, but very slowly. Also, as I indicated, additional stimulus money may enter the economy, which would be good for all. However, we are left with a government intervention hangover and how the hand off back to corporate America goes will shape 2010 in some fashion. The energy sector should be active and gold will be volatile as investors try to answer the inflation question.

Allocation returns to importance as the world tries to shake the global recession. Nothing in 2010 will be easy, but it certainly will be interesting. Happy New Year and Happy Investing in 2010.