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11.24.2009 / A Message from the CIO: 3rd Quarter Market Review. Posting by Stephen Frantz, FNBO Chief Investment Officer

The third quarter of 2009 proved to be a strong one for the financial markets. Convinced that the recession was drawing to an end, investors flush with cash rushed back to the markets, sending the S&P 500 Index up over 15% for the quarter, and up over 57% from the lows reached on March 9th. The bond markets also rallied, with the focus being on lower quality corporate bonds in an apparent desire for yield.

"Convinced that the recession was drawing to an end, investors flush with cash rushed back to the markets."

Earlier this year an unprecedented amount of liquidity was being pumped into the Global Financial System. It now appears that this massive policy response worked in pulling the United States back from its worst recession since the Great Depression. Equity markets across the globe have seen significant moves off their lows. We have seen similar heady moves in the bond markets with corporate bonds, in particular lower quality corporate bonds, which are showing equity type returns year-to-date.

Unfortunately in the United States, personal balance sheets remain impaired with significant levels of debt, and we are still searching for a top in the unemployment numbers. Our forecast is for somewhat below normal growth in 2010 and 2011, in the 2 to 2.25% range. One would expect a much higher rate coming out of a recession in more normal times, but given the fiscal issues confronting the American consumer, its banking system and government, it becomes hard to be overly optimistic about growth any time in the near future.

The deflationary forces unleashed by recent events, including the recession, credit bubble bursting, deflation in housing, etc., may stay with us for some time. However, if policy makers in Washington do not get our fiscal house in order relatively soon, there is a strong probability of some increased levels of inflation somewhere down the road. We have already started to see some evidence of this “reflationary” trend show up in certain asset classes, specifically gold, the dollar, and certain industrial commodities.

The ride may continue to be volatile and rocky for some time to come. Although we are constructive on global financial markets longer term, concerns about the short to intermediate term remain. At the beginning of this year, it was possible to invest in high yield debt securities that offered equity type upside, these opportunities appear to have played themselves out and no longer look abnormally attractive. The S&P 500, after moving significantly higher from the lows reached on March 9th, appears to be reasonably valued, but with considerable risk to the earnings side of the equation. In our opinion, international markets are more attractive than their domestic counterparts. However, due to the significant gains seen over the last six months, the potential for a near-term pull back exists.

With all this in mind, I would like to draw you back to our mission within First National Bank’s First Investment Group - seeking above average returns with below average risk. Risk is a concept that tends to come in and out of favor over long periods of time, depending on where we are in the market cycle. Although we seek competitive returns, we always do so with a careful eye towards principal preservation.

For more information on First National Bank’s First Investment Group, visit www.firstnational.com and click on Planning & Investment Services.

What are your thoughts for the 2010 financial markets? Do you think the recession is over? Please join in.



Comments are provided as general market commentary and should not be considered investment advice or predictive of any future market performance.

Investments are: Not FDIC Insured • May Go Down in Value • Not a Deposit • Not Guaranteed By the Bank • Not Insured By Any Federal Government Agency

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