MARCH 2009 NEWSLETTER

Sometimes I feel like Peter in the Hans Brinker legend, although I am running out of fingers to plug the dyke. You are also probably tired of hearing the next theory about how things will get better or worse for our economy. Let’s just concede that we are in very bad economic times and that things will probably get worse before things improve. The only consolation is that we had some forewarning of the severity and can probably weather this storm better than some of our family, friends and neighbors. You and I can beat ourselves up for not taking bolder action back when we “knew” the red flags were flying. It is not productive or healthy. I suggest we  move forward and make the best of the future using the lessons we have learned.

Please recall that the stock market looks forward; it is a leading indicator. Unemployment is a lagging indicator. There are still signs of life in the economy that support an opinion that a recovery is possible. For example, consumer spending was up 4/10ths of one percent in January according to the Bureau of Economic Analysis (http://www.bea.gov/newsreleases/national/pi/2009/pi0109.htm ). We all know the government is preparing to spend a lot. While we may not agree on the appropriate targets for the spending, the fact remains that dollars will flow through the economy. We can talk about the cost in terms of inflation and taxes later. Let’s just continue to support the attempt to have a living, breathing economy and culture to repair when this crisis has passed.

I would like to share an example of the panic-driven selling that is prevalent in the stock market. I present a company you may recognize, Washington Real Estate Investment Trust (WRE). If you, like me, own Neuberger Berman Real Estate Securities (NRO) as part of your portfolio, then you own shares of WRE. The company owns commercial real estate in the D.C. metropolitan area. It has very low levels of debt as well as a low cost of debt. It also has high quality tenants and desirable locations. It has one loan to refinance in 2009 and 80% equity in that property. It expects its funds from operations to drop 5-8% in 2009. Now, how should that company be valued? Is it an appropriate reaction to pay 10% or 15% less? Well, the market has bid it down from $39 to $15 per share, representing more than a 60% decline. In my opinion, the dividend is safe even though it may be lowered. Therefore, getting paid while we wait for better economic times and a potential rebound in value, is a prudent, if not pleasant, course of action.

A similar line of reasoning can be found in a recent Wall Street Journal article by Brett Arends, titled “Has Fear Blinded Investors to Value?.” (http://online.wsj.com/article/SB123628376026343465.html)  In it, Mr. Arends questions a historical market notion known as the “efficient market hypothesis.” This has maintained that the price of a stock reflects all known data about the underlying company. While the market is prone to very quickly disseminate news as it is released, that does not necessarily mean that stocks are trading where they should be. Our market, and our global economy in general, has more participants than ever before. The enormous waves of panic selling that have been observed over the past 15 months make it very difficult for even the most rationale investor to discern how valid prices are. Because your neighbors dumped all their shares of Berkshire Hathaway, does that then mean it should be worth 45% less than it was 12 months ago? The simple answer is “no.”

Respectfully,

Your Advisors at Dominion Wealth