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Michael Tedesco

Expert Insights: Investing industry

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Michael Tedesco is first vice president of The Tedesco Group, and part of Morgan Stanley Smith Barney's Global Wealth Management Group.

How has the financial crisis reshaped the investing industry and its major players? What are the new demands/challenges/opportunities facing investors, advisers, money managers, etc.?

Discussions surrounding the current economic crisis are challenging in many ways. To provide background, where does one jump in to begin addressing how the world found itself in the predicament it is now in? During 2008 and early 2009 we witnessed the failure of several well-known firms, countless hedge funds closed their doors, and many longtime financial professionals exited the industry altogether. To call this an industry consolidation may be the understatement of the century.

This was a profoundly different financial crisis than many the world has endured in periods past, such as the Latin debt crisis of the 1980s, the Asian financial crisis of 1997-1998, or the bursting of the dot-com bubble nearly nine years ago. In those instances, the pressures were confined largely to a region or asset class, while the rest of the world benefited from insulation and resilience. This time, there were very few places to hide. The unbalanced world that we as consumers continued to grow comfortable with is now in the process of a painful but necessary rebalancing. Many would argue that the spark to the current economic crisis was marked by the end of the housing boom, which ultimately revealed excesses related to subprime mortgage lending and the underpricing of risk. At the root of the crisis, however, was the loss of confidence in the strength of the financial sector and reluctance among credit market participants to lend to one another.

Michael Tedesco

If I were to narrow down the challenges now facing investors, at the forefront of the list must be a gradual restoration in confidence. Confidence in the capital markets, confidence in policy response and confidence in the ability of our policy leaders to not lose sight of the factors that created this crisis and the avoidance of similar behavior moving forward.

Are there any investing signals or trends you think are worth watching?

There are two main factors working overtime to continue to place pressure on the economic recovery. The first factor is policy traction. The recent government financial programs designed to combat a deteriorating economy will take time to work their ways through the system and will certainly play a key role in determining the endurance of this recession.

The second factor that continues to weigh on the capital markets continues to be the course of incoming economic data. Expectations are for the fiscal stimulus and accommodative monetary policy to promote positive economic growth in late 2009 and a modest sustainable recovery in 2010. With the S&P 500 index having rallied substantially from its lows in early March, the logical question is how sustainable is this rally going forward. The positive case shows that evidence of a gradual recovery in the U.S. and global economy is very much intact and that the headwinds of tight financial markets and a freefall in economic data have abated. However, new headwinds are surfacing. Consumers, who account for greater than 65 percent of GDP, are embarking on a long-term deleveraging process; tighter risk controls and regulation will likely limit credit availability to levels below historical norms; rising energy prices could stifle consumer income and spending; and the corporate earnings recession in the United States continues to unfold.

Many of these factors are critical in the evolution and development of a more meaningful economic recovery. There is no mistaking the significant improvement in investor sentiment as well. Investors' appetite for investment-grade and select high-yield securities has provided companies with easier access to capital for short-term funding needs. Major financial institutions have been able to issue non-government backed debt and equity. This is an action almost unthinkable less than a year ago, but yet another sign of normalizing capital market conditions.

-- Compiled by Rebecca Go

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