DECEMBER 2008 NEWSLETTER

It’s official. We are living through historically bad times. We will look back and consider it a badge of honor to have survived. It’s OK to be scared. It’s natural. What’s not OK is to fall prey to our animal instincts that come to the fore when we are scared. This is one time when we have to override our emotions and do what we logically know is right with our investments even if it doesn’t feel good.

Matt said it very well recently and I quote: “Remember, this was a car accident. (No one could have foreseen the panic sell off that began in October.) We need to get out, make sure everyone's ok, call our insurance company, get the car to an auto-body, patch it up a bit, and THEN stay off the road.”

Our plan is to let the market rebound a bit and then “stay off the road” by exiting most stocks and stock funds and going to cash to preserve capital while waiting for bonds to go down in price. We certainly don’t want to buy T-Bills at negative after-tax and inflation rates of return. These are signs of extreme panic.. Let’s stay calm while those about us are losing their heads and their long term financial security.

Please follow the link below and review the chart and timeline of events for 1929-‘48 and 1968-’82.

http://www.taloneight.com/SecularMarket2948.html

As Mark Twain reminded us, “History does not repeat itself at best it sometimes rhymes.” This history lesson should confirm in your logical mind that investment markets do not go straight down forever. In fact, there are bear market rallies that give an investor opportunities to recapture and preserve portfolio value. There are then opportunities to reenter markets and take advantage of long upward trends. These time periods also give us confidence because they were affected by the demographics of the time in the US. The population had reached its peak in spending and consumption as the Baby Boomers are now.

For the more technically-minded, banking/credit and monetary factors that have improved dramatically over the last year and especially in the last few months. The Federal Reserve has injected a tremendous amount of money and easy credit into the economy. Money or liquidity is to an economy what oil is to an engine. We had dangerously low and as with an engine, we were close to seizing up. Specifically, the banking system’s free reserves were NEGATIVE $400 billion. The prior low point was negative $4 billion back in the late ‘70’s and early ‘80’s recessions. The free reserves are still at negative $86 billion but moving quickly in the right direction. As the economic fundamentals show any sign of improvement, I believe that the negative sentiment will turn quickly positive. We must be in the market to take advantage of the quick moves.

For example, since November 20th the major market indices have been up as much as 18%. This move happened in less than two weeks. We will probably bounce along on this bottom and climb the famous wall of worry. Hopefully, the climb will be as high as the worry is deep!

I also invite you to listen and watch a webcast that is currently on the Schwab website. It is very instructive. Liz Ann Sonders does a great job of reviewing the current state of the economy and how it relates to the investment markets, stocks and bonds. Please go to www.schwab.com, then “Research and Strategies” tab, then “Market Insight” tab, then (lower right side of page) “Straight Talk.” The title of the video is: Good tidings or a lump of coal?

Lastly, you may be able to catch a viewing of the two shows on the History Channel. One is good history of the Great Depression and what the leaders of the day did well and poorly. The other is review of the current financial crisis. There are similarities in our current circumstances to the Great Depression. There are also differences that may protect from having the 25% unemployment and a three year US recession. The effect of the intertwined global economy is still an unknown.

Scared investors forcing fund redemptions and margin calls forcing liquidations of losing positions have abated for the most part. After selling to capture tax losses here at year end, the stage is set for long term investors to begin buying at these ridiculously cheap prices. This demand may help lift prices as the economy begins to show signs of not being completely dead. Remember, even with 15% unemployment 85% still have jobs and spend money. The massive ($7.8 trillion) injections of liquidity, guarantees and asset purchases by the Federal Reserve and Treasury should allow banks to extend credit and allow the wheels of commerce to turn freely again. The ensuing investor and consumer confidence may provide lift to the investment markets.

We wish you the merriest holiday season and hope you can enjoy the important things in life during this typically joyful time of year. We look forward to sharing a more prosperous New Year.

Respectfully,