Gerber and Co., CPAs and Financial Advisors

BIG IS BETTER: As we have been anticipating for a while, the larger corporations have been reporting good profit growth overall, largely as a result of increased efficiencies and layoffs. We do not underestimate the powerful profit-generating ability of cost cutting - and we regard these additional profits as real.

Large corporations have unprecedented amounts of liquidity on hand - our estimate is that the largest 500 companies have in excess of $1.5 trillion in their coffers which is about 4 times what it was 10 years ago. They also have access to borrowings at low interest rates and can issue more shares at very high relative prices. This unprecedented access to liquidity explains the spate of large acquisitions taking place by them and we expect to see more of this activity.

These big companies are also the ones that tend to have global operations, including a growing presence in the merging market economies - and they have historically paid steady dividends. Hence our overweighting in this segment. The smaller enterprises though have no access to funds and business formation is still very low. That is historically where job creation has taken place.

EMPLOYMENT: The growing ranks of unemployed, the fears of job losses among the employed and the fact that the US consumers are rebuilding their personal balance sheets which were devastated by the housing market collapse and are thus not spending much - all mean that the recovery will be delayed and will not be consumer led. We estimate true national unemployment to be around 16% - almost double what is being reported primarily because independent contractors who have no work, furloughs / cutbacks and those who have been long term job seekers are all excluded from the official counts. The fact that Gross National Product is back up to pre-collapse levels and yet this stubborn unemployment continues is not an indication of an uptick in employment anytime soon.

Washington apparently believes that "stimulus" and the extension of unemployment benefits are a solution to the economic problems we face. Cash-for-clunkers is a good example of a government sponsored program that achieved virtually nothing. A dramatic expansion of the Small Business Administration and tax incentives are the only proven way to create real jobs and to materially impact the economy. That reality may be finally dawning on the Hill.

SEA-CHANGE: When we realize that the past 25 years of global economic growth was led primarily by US consumers, it is obvious that a sea-change in how the global economy functions is taking place. .

THE "D" WORD: Although many are concerned about inflation, we believe that although it will ultimately be a significant problem, the short and intermediate terms are far more likely to experience deflation. For there to be inflation we need 2 elements to be present: Increase in both the supply and the velocity of money. Currently for the reasons stated above, there is very low velocity of money - stoked largely by consumer fear and uncertainty.

We therefore have more assets allocated to fixed income and bonds than our historic ratios in most portfolios. Our emphasis on highly rated investment grade bonds has been well rewarded as we have not had a single bond default or be materially downgraded for any of our clients.

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