These are extraordinary times. The “credit crunch” which began with the sub-prime mortgage mess has evolved into one of the most significant financial crisis of modern times and is ranking among one of the most difficult that investors have faced in several generations.

Simply stated, there is too much leverage and too many bad assets on the books of financial entities. In many instances, these assets represent complicated debt products for which valuation proved difficult or non existent in prevailing market conditions. How we got here is a long and fascinating story, but here we are. The dominoes were set in motion when increasing levels of defaults became apparent in the sub prime mortgage market. This was the tip of the iceberg. What ensued has had far and wide reaching ramifications. At the core, we are facing a crisis of confidence at a critical time in our economy. Confidence is part of the fabric of our economic system. After all, each of us provides goods or services in exchange for green pieces of paper for which a certain level of confidence is required.

There weren't many places to hide in these stormy markets. On the domestic front, the S&P 500 was down 19.29% and the NASDAQ Composite was down 25.21%. Foreign stocks fared even worse with with the MSCI EAFE down 29.26% and the Emerging Markets Index down 37.78%. Fixed income securities did not provide much of a cushion to offset equities with government securities only up slightly and municipal and corporate bonds down for the year. At the end of a bear market, everything falls precipitously and there is a large degree of volatility. We have just ended the fourth consecutive quarter of falling stock values. This had not occurred in 31 years. Although no one can predict, this certainly seems like we are getting closer to a change in direction.

The good news is that we will get through this. Although reactive in nature, the leadership is committed to promptly deal with this situation, particularly since the severe market drop of Monday caught their attention. Even if the economy continues to slip into a more widespread recession, it should be a mild one. Once we return to some degree of normalcy with the credit markets, the stock market which is forward looking could bounce back forcefully. Of the largest financial crises over the last 20 years (Sweden, Mexico, Russia, Thailand, Hong Kong and Japan), the markets have tended to bottom within 12 months following the bailout announcement with significant appreciation in the following years. With a bailout scenario playing out, many areas of the US equity market are significantly undervalued and we are looking at a potentially huge buying opportunity. A shift in confidence can occur and can quickly create a dramatic shift in perspective.

If we as investment advisors knew of a way to smooth things out and make investing a nice easy ride, rest assured we would do it. However, only one strategy has ever proven to consistently work over an extended period of time; asset allocation (how much in stocks, how much in bonds, etc.), portfolio diversification (the number and type of securities we own in the portfolio), portfolio rebalancing (sell appreciated assets to reinvest in assets that have dropped in value) and of course, time. That is and remains at the core of our investment strategies.

We realize how painful it can be to watch and try to make sense of the short term gyrations in the markets, particularly as we are inundated by all the noise around us. Success in the markets is not measured in days or months but over many years. If it were easy, everyone would be very wealthy. Markets can come down very quickly, but the inverse is true as well and staying the course is critical.

In closing, we are optimistic that the issues will get resolved and that at current levels, the stock market is providing us with a rare opportunity once the credit markets start to flow again. Of course we are continuously monitoring and making adjustments as needed to balance the return opportunities with the risks as this landscape is changing at an ever increasing pace. We are honored to have your trust and confidence as we help you navigate these difficult times. Hang in there, be patient, and stay the course.