NOVEMBER 2008 NEWSLETTER

“May you live in interesting times.”

It is apparent now, more than ever, why this is considered to be a Chinese “curse.” Nowadays I am certain that I will wish for the return of more boring times. Before we move on to the technical aspects of this month’s newsletter, I will briefly share with you that I do not like horror movies…never have…never will. As a result, I don’t watch them. The parallel here is that if you find the 24/7 daily news surrounding our investment markets to be troubling, the easiest solution is to not inundate yourself with it. Stay informed, but moderate the volume you consume. Keep in mind they are in the business of keeping you glued to the set, and “the sky is falling” is always the best sell.

We continue to witness extreme irrationality in the investment markets at this time. Yes there are economic forces at work that will displace a lot of workers and businesses. We may go to 85% employment (15% unemployment). We may be in a recession for a year or longer. The world, however, will continue to spin.

Our economy routinely goes through something known as the business cycle (see attached chart). In good times, the economy is expanding, employment is rising, companies are making money and the Federal Reserve is monitoring inflation to keep things in check. Ultimately the economy reaches a peak and begins a gradual downward slide, or contraction, as inflation and other forces catch up to the benefits of the earlier expansion. The economy will reach a bottom, or trough, as unemployment rises, revenues fall, and the Federal Reserve endeavors to stimulate lending by easing interest rates. We point this out to illustrate that stocks tend to lead the business cycle…often by 3-6 months. This means that it is possible to still be in the throws of a recession when a rebound begins in the equity markets. Keep this in mind that as you hear continual references to our country “officially being in a recession.” Stocks had already begun this decline 3-6 months prior and they will most likely rebound while we are still fixated on poor earnings reports and higher weekly jobless claims.

Another phenomenon we are noticing in the market on a daily basis is falling prices AND falling trading volume. The daily roller coaster-like dips are dramatic for certain, however they are being driven by less and less buyers and sellers. Part of this can be traced to something known as de-leveraging. People who own a great deal of stocks and funds on margin are seeing their portfolio values fall below the minimum maintenance requirements imposed by custodians (such as Charles Schwab). As a result, these people are being forced to sell in order to reach these requirements. The strong players know this. Keep in mind, for every seller in the market there is a corresponding buyer. Why would anyone ever pay fair price if someone were forced to sell you their product or good at a lower price? This is what we believe is happening. Buyers are lowering their offers and sellers are being forced to accept them. This will drive stock prices down well below fair market value. Make no mistake, the strong players are buying up cheap shares and positioning themselves to benefit greatly when stocks begin to head out of the recession.

So what does this to mean for you and your portfolio? The benefit of the planning and investment management we do for you is to know you can weather even extreme investment and economic storms like this. Building diverse portfolios and putting different layers of income protection in place puts us in the position of being able to strategically meet your income needs and short-term objectives. We need to bend with the wind. The key is to be able to stand straight, if with a few less branches and leaves, after the storm passes.

Respectfully,