Stock markets around the world have now declined to new lows calling into question the possibility of a bottoming process that so many investors (including yours truly) had hoped for recently. Though recent market activity and poor economic news can be unsettling, this is an important time to keep perspective on a number of issues:

In the short term - stock markets are deeply oversold
Not since the September 2001 terrorist attacks have stock markets been at such oversold levels. These periods usually lead to a short term, significant and sharp reversal in stock prices.

Though indexes are at new lows…many stocks are not
Many stocks today (including many you own) are above their October low points, even though market indexes have broken those lows. This is common in the last stage of bad markets as investors “give up” on poor quality companies with questionable earnings.

Your stocks and portfolio are weathering this period better than indexes
Our higher than normal cash and bond balances have mitigated some of today’s downside. Moreover, our overweight positions in consumer staples and healthcare are holding up much better than the average stock.

Investor pessimism and money market balances are at record highs
Money market balances exceed $4 trillion and investor pessimism is “off the charts”. This combination of statistics is usually indicative of a market bottom or a market that is close to a bottom.

Help is on the way for the global economy
Though the global economy is in a recession that began in late 2007, serious help is on the way. The combined efforts of the Federal Reserve and Treasury Departments are of historic proportion and will eventually (within another 6 months) have a positive effect on global economies. Remember that stock markets usually bottom and begin their recovery 6-9 months before the economy recovers (about where we are now).

We still maintain our stop loss strategy and our defensive position in your portfolio. However, the further stock markets decline, the more great, long-term values are being created. Though many investors may feel like this is the time to panic, it is really the time to be patient, do our homework, and carefully and thoughtfully take advantage of the great opportunity that lies ahead.

We hope this note is helpful during this turbulent time.

Sincerely,

James E. Demmert
Managing Partner