(Michael Farr) - Last Sunday, the House passed a historic $938 billion health care bill and on Tuesday, President Obama signed the bill into law. The Senate will try to pass a second measure passed by the House on Sunday amending portions of the bill through a process called reconciliation. This massive health care overhaul is expected to guarantee insurance coverage for 32 million uninsured Americans. The cost of covering these currently uninsured citizens is expected to be covered by a combination of taxes on wealthy individuals and companies and through Medicare cost cuts.

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(Michael Farr) - We typically focus our market commentaries on discussions of topics that impact the equity markets. However, Farr, Miller & Washington also manages bond and balanced portfolios for its clients. A couple of things have happened over the past 2 years that have transformed the once boring fixed income market into something a bit more interesting. Today's blast will focus primarily on big changes that have occurred in the municipal bond market and how Farr, Miller & Washington is taking advantage, on a very selective basis, of these dislocations when building conservative bond portfolios.

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(Michael Farr) - Toyota's recent problems with "unintended acceleration" and faulty brakes could prove to be a valuable lesson for those who believe that protectionism is the answer to all our problems. Earlier this week, Senator Mike Johanns of Nebraska questioned whether the US should impose restrictions on Toyota vehicle imports in response to the safety concerns. He pointed out that Japan had banned imports of US beef in December, 2003, when fears about Mad Cow Disease were widespread. The beef ban remained in place until 2006, causing much harm to the US cattle industry. Up until the ban, Japan had been the industry's largest export market. Needless to say, Japan's actions caused much anger and led to calls for retaliatory trade restrictions on Japanese imports. The fears of a trade war were very real.

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(Michael Farr) - Timing is important. When the old Medicine Man was asked if rain dances really work, he answered that they most certainly do but a lot depends on timing. "How are your investments doing?" may be one of the most complicated of all investment questions. There are a number of considerations: relative to what benchmark; over what specific time period; for what risk level? Measuring the twelve months ended March, 2009 would have resulted in horribly negative returns (S&P 500 was down -39.7%, excluding dividends) using most any long strategy. Measuring the twelve months ended September, 2009 was only modestly negative (-9.4%), while returns for the year ended December, 2009 were strongly positive (+23.5%). Moreover, a portfolio that fared relatively well during the downturn (ie, declined less than the overall market) may not have fared as well for the rally. In fact, a defensive portfolio would be expected to produce results inferior to the overall market in strong years such as 2009. Conversely, an aggressive portfolio would be expected to suffer much more than the overall market in declining markets while rebounding more quickly than the overall market as the markets rebound.

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(Michael Farr) - The S&P 500 has now declined over 7% from the recent peak on January 19th. This drop has come despite a round of corporate earnings that were largely ahead of expectations. So what gives? We thought we'd take a stab at what's driving the correction. The following is our list of factors that we believe are concerning investors. These factors reflect the tenuous nature of the "recovery", and they reinforce the notion that we have a long road ahead of us. Most people are pointing to the sovereign debt "crisis" in Europe as the primary factor for the recent sell-off. While the main focus has been on Greece, there are several other European countries running huge deficits that may pose a problem in the near term. These so-called PIGS (Portugal, Ireland, Greece, and Spain) have seen their borrowing costs rise as investors have become more nervous about their ability to fund their deficits. While it appears the EU and other institutions may be rallying in support of Greece for now, this issue will likely affect the markets for a while. Incidentally, we would note that the US deficits as a percentage of GDP are trending dangerously high as well, and they are expected to remain so for the next couple of years (see last week's market commentary). In the best case scenario, we are going to needavery painful round of belt-tightening across the globe in order to shore up confidence in these debt markets.

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(Michael Farr) - On Monday, President Obama submitted his 2011 budget proposal to Congress. The long-range budget projections, included within the administration's proposal, sent shivers down the spines of deficit hawks. By all accounts, our current course is unsustainable, and something must be done. Put bluntly, Americans simply require more out of their government than they are willing to pay in taxes. Absent drastic action to reverse the deteriorating outlook, we should all expect lower living standards for ourselves, our children and our children's children. But alas, election years are not known for the implementation of painful decisions. We fully expect another year of unheeded warnings, deferral of tough decisions, and unchecked spending. All the while, however, the voices at Tea Party rallies grow steadily louder. Are we nearing the day of reckoning, or can we afford to defer fundamental reform indefinitely. Only time will tell.

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(Michael Farr) - Most of the larger banks have reported fourth quarter earnings already, and we must admit the results were better than we had anticipated. In general, the growth in problem loans declined, capital and reserve ratios strengthened, low-cost deposits continued to grow at a robust pace, and earnings largely surpassed estimates. Absent the bucket of cold water that President Obama threw on the sector when he announced new regulatory initiatives late last week, the 4Q results may have actually strengthened the resolve of those that believe we are nearing a peak in credit losses for this painful cycle. So while we at Farr, Miller & Washington remain non-believers for now (which we will explain further below), let’s examine some of the factors that have many people believing that the days of outsized loan write-offs at the banks are nearly over.

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(Michael Farr) - For the past 7 years we have published our Top Ten Stocks for the coming year. The results have been very gratifying, but we need to be mindful that concentrated positions also concentrate risk. Some institutional accounts have expressed interest in more concentrated portfolios like this. I buy this list personally for one of my personal accounts on the first trading day of the year and sell it completely on the last trading day of the year.

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