Week of 12/31/08

PAST AND PRESENT SCHIZOPHRENIA

Investors will soon say goodbye to one of the worst years in the history of both the U.S and International Stock Markets.  As of Friday, December 26, the total return for the S&P 500 index was -39.16%, while the Morgan Stanley Capital International (MSCI) benchmark for Europe, Australia and the Far East was -46.27%.  As difficult a year as it’s been, and as gloomy the economic outlook is for 2009, the following table does provide some encouraging numbers for the stock market’s performance over the next several years. 

*Based on Dow Jones Industrial Average
Index is property of Dow Jones & Company
Source: Zacks.com

You can see, in every case, the market rebounded significantly over a 1, 3 and 5 year period.  What we are trying to illustrate above is that even though things seem difficult right now, it will not be this way indefinitely.  Rebounds eventually come and in many cases, they come rather quickly.  We believe that the stock market can provide solid returns over the long run, and will continue to look for the right opportunities and invest prudently on your behalf. 

As always, we appreciate your business, and wish you much joy and prosperity in 2009

Rush Zarrabian

Past performance is no guarantee of future results.  The S&P 500, DJIA and MSCI EAFE are unmanaged indexes and you cannot invest directly in an index.

Week of 12/18/08

TEA LEAVES

I often use the phrase “drinking from a fire hose” when referring to the incredible amount of information (some useful, some useless) that we read and hear every day.

To that end, we are looking at the following information as news-worthy and important to deciphering the future trend of the market into 2009:

1)  The Fed’s decision to further lower rates is significant, only in that it shows the incredible amount of concern that our Government has toward the severity of our current state.  This action is in-line with our projection that 2009 will be a year of healing and modest market gains.  Currently, we are positioning portfolios for a mid-year 2009 economic upturn.

2)  Continued employment problems.  We expect that unemployment will continue to rise throughout the 1st quarter of 2009, peaking around 8%.  We expect this trend to level off and sustain employment again in the 2nd to 3rd quarter of 2009.

3)  Earnings.  A full 20% of the S&P is not forecasting earnings for next year. This reflects our largest corporations being concerned over the business environment.  As we utilize a macro (top down, economy first) approach to our investment decisions, this is less problematic for us, as it does not warrant a change in our filtering process of investment choices.

4)  LIBOR.  Credit and liquidity is still a problem, as we have not approached the pre-Lehman Bros. rate of interest for bank to bank loans.  This rate must continue its downward trend to normalcy over the next 6 months.

5)  Credit and Liquidity.  The small consumer credit markets are still broken.  This is important because the US consumer makes up approximately 2/3 of the GDP.  The problem is two fold.  First, consumers with good credit are not consuming.  In order for a recovery to occur, these consumers (mostly clients like you) must have enough confidence in tomorrow, to borrow or buy today.  Second, those consumers with less than stellar credit, must be able to access additional credit. We are witnessing the credit card company’s removal of credit and the creation of a downward cycle, due to a lack of cashflow and low credit score problems.

One of our main concerns is that the Government has used its available monetary arrows and has nothing left to prompt the market.  While many talking heads speak of deflation and stagflation in the present, we also need to worry about inflation in the future, as the incredible amount of “stimulus” is worked through our system.  The bottom line, after all of the economic buzzwords, and analysis is this; Will the cure be worse than the cold?  Are the actions being taken ultimately good for our long-term prosperity or conversely, a short term fix at the expense of future generations?  Time will tell, and the first six months of 2009 will show us which path we are taking.  We believe our economy will start to recover in 2009 and the markets (which always run in advance of the economy) will show signs of life early on, especially late in the second quarter throughout 2009. 

As all of you know, we stand ready to adapt to the market conditions as they present themselves.  While we put a great deal of effort into preparing for the market, we also realize that the market is an incredible emotional being.  If the data coming through does not prove out our bearing, then we will adjust our course as necessary.

- Scott Airey

Week of : 12/12/08

BOBBY FISCHER

For those of you who play chess, Bobby Fischer is a household name.  I bring up Mr. Fischer because I believe we are witnessing a chess match of huge proportions concerning the auto industry bailout.  Like the initial $700 billion rescue plan that initially failed to pass because of political positioning, I feel that this too is a gambit played out by both parties.  In chess, the objective is to protect your King, while attacking the opponents, the best strategy wins.  Positioning of the lesser pieces (pawns) is vital to the use of the power of the better pieces (Rook, Bishop, Knight, and Queen). I believe we are seeing the pawns being played and with the higher point pieces most likely coming out later today or next week. 

Our objective, if we can make the analogy complete, is to witness the game, watch the pieces that are played and invest accordingly.  Today will be extremely volatile.  We will be assessing the situation and making adjustments to our strategy if we feel it is warranted.  First, however, we must remove the noise from the situation, turn off the rhetoric on TV, and keep our eyes focused on the big picture.

- Scott Airey

Week of : 12/3/08

BUTTERFLY EFFECT

This is a popular term that speaks to the concept that a small change in the present, may lead to a much larger change, and impact in the future.  The most often used example is the flapping of a butterfly’s wings having the potential to create changes in the atmosphere, ultimately causing or preventing the occurrence of a tornado.  In dealing with and trying to understand the complexities of today’s markets, we need to understand that our current markets are extremely sensitive to any flap of the butterfly’s wings.  Any data, any comment can and will send the market reeling.  We have witnessed this since October, and I fully expect we will continue to suffer through market extremes.

Was Lehman the butterfly that created our current market tornado?  Was 9/11 the butterfly, or the removal of the Glass-Steagall act?  All too often we are left scratching our head at the end of the day, trying to logically understand the market movements.  Presently our work is not to debate the cause, but to deal with the effect.  We still believe that a return to a normal market cannot occur until the credit markets are functioning properly and the Government takes unprecedented steps to ensure equilibrium is maintained.  It will take time and the Government needs to step cautiously, as the potential cure could be worse than the present condition.

As always – we appreciate your business through these tough times and we are working every day to ensure that we are making the best possible decisions for you and your families.

- Scott Airey

Week of : 11/20/08

HUMAN NATURE VS. THE MARKET

"We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful." - Warrn Buffet

Many of you are concerned.  We understand this reaction, as it is human nature to hoard and protect in times of trouble.  However, the market is not a normal entity and does not reward natural human responses.  Human nature, left unimpeded, will consistently make the wrong choices at the exact wrong time.  History tells us that the average investor’s return is some 3X less than the market.  Why? Our nature tells us to sell, run for the hills and only invest when we are confident.  This can be easily translated to the axiom “sell low, buy high”.  We all know this is not optimum!

Like you, we are losing sleep, we are up at 2am thinking about our strategies and making sure we are giving sound advice.  We are reading, researching and speaking to other industry experts.  We are continuously adapting to market circumstances and making the necessary adjustment to your portfolios.  Like you, we are frustrated with the amazing speed of the market and the relative turtle like pace of our leaders. 

Our goal is to successfully bridge the gap between fear, the damage it causes, and the reality of a temporary economic recession.  The only question is the duration of this downswing and the steepness.  What is not in question is our eventual expansion and return to normalcy.

- Scott Airey

Week of : 11/14/08

PAULSON AND BERNANKE / ABBOT AND COSTELLO

Most of us will remember the famous “who is on first” exchange between Abbott and Costello.  Yesterday, Paulson reminded me of just that as he spoke of the government.  It has gone back on its original plans to buy troubled assets and is now focusing on a different way to stabilize our economic system.  Is it any wonder that the market sold off some 5%?  The market abhors uncertainty, and Paulson has just provided a heaping spoonful for us to digest.  Instead of “who is on first?”, my start to the exchange is “who is in charge?”

However, yesterday’s volatility points out that we must not venture too far into the tactical arena and keep our focus on the overall strategy.  We do not expect the markets to skyrocket in a day, but to recover and build upon the trillions of cash put into the market by the worlds’ governing bodies.  Long before the economy starts to work (as mentioned in the “Dylan” entry; a 12-18 month wait) our markets will start to perform.  Waiting until we have positive GPD, low unemployment etc., will mean buying at a significantly higher mark than where the market is currently – or put another way – when it is evident that the economy has recovered, the market will have already realized most of its gain from our current level.

This market will test even the most experienced investor, but we remain steadfast in our belief in the overall economic recovery and that the return to normalcy of our markets is not in question.  The only question that bears thought, is the timeframe and how much risk is needed to reap the commiserate reward.

- Scott Airey

Week of : 11/11/08

HEDGE FUNDS, MUTUAL FUNDS AND BOB DYLAN

Most of you are probably wondering why the market fell 10% Wednesday and Thursday on no real news, and was up on Friday on dismal unemployment news.  The answer my friends, like Mr. Dylan’s song “is blowing in the wind”.  Like Dylan’s mystical answer to his questions in the 1962 song, there are valid economic reasons for our current volatility, yet the truth is that they cannot account for all of our daily market swings.  Our markets work on the efficiency of matching buyers and sellers, and reap rewards based on inefficiency of information.    If the answer was quantifiable, or scientific, the market would cease to exist as perfect information would lead to only sellers or only buyers.  A no-risk market is not feasible. 

The wind is blustering with hedge fund redemptions and mutual fund redemptions, howling with unemployment, GDP, earnings, credit and liquidity and knocking us over with potential bankruptcies such as GM.  We need to take shelter and keep our heads clear by realizing that our greatest concern is perceived risk relative to duration, or time.  As bad as it currently feels, no one expects we will be stuck in recession forever.  The most pessimistic economic forecast I have found predicts a 3–5 year window of recovery. We believe that in 12-18 months our economy will be trending upward (not fixed but clearly on the mend) and the markets will respond favorably. For example, following the Great Depression (-71%) market (S&P 500) rallied 148% (1933-1936); following WWII (-34%) the markets rallied 100% (1942-1945); following the oil crisis (-42%) the markets rallied 57% (1975-76) and following the Internet Bubble and War on Terrorism (-40%) the markets rallied 67% (2003-2007)*.  While we cannot guarantee the same type of returns, history is our teacher and with a little time, the wind will be finally at our back and music to our ears.

We greatly appreciate your business and thank you for your faith in our abilities during these trying times.

- Scott Airey

*Source JPMorgan Market Insight Series

Week of : 10/31/08

COUNTERPARTY RISK

In continuation of our “Red Light – Green Light” analogy, the next red light is counterparty risk.  While counterparty risk may sound complex, you and I deal with this issue every day.  Counterparty risk is the risk of insolvency of the other person or “party” in a financial transaction.  Put very simply, if I loan money to you, I run the risk that I will not get paid back.  This is a fundamental building block in our financial system of investment and one of the reasons our market was created.  Our markets at a simple level, provide liquidity to match buyers and sellers. However, when counterparty risk comes to roost, there are no buyers or sellers or entities willing to take the risk in a transaction.  This is true at the very highest levels of finance, where, over the past 2 months, we’ve seen banks unwilling to lend to each other.  In turn, as capital flows downwards, they have been unwilling to lend money to the average consumer.  If counterparty risk can be reduced by the Government’s rescue plan (the government loaning money or supplying capital by buying equity), then the market can start to return to normal and liquidity can return.  Currently, counterparty risk is the RED light, while our previous Red light, the LIBOR rates, have started their slow change to green.  Although we are not at normal rates yet, they are trending lower.  As the cost of short term borrowing is reduced (LIBOR) and becomes readily available, we expect counterparty risk will be reduced as the next logical step.  This will provide the fundamentals to rebuild the structure of our market.  Until this is a reality, we will continue with the chaos of +/-10% daily swings in the market, as the probability of short-term success or failure is quantified and magnified through our markets.

- Scott Airey

Week of : 10/24/08

HERD MENTALITY

We’ve all seen, and probably even participated in, the stampede at one time or another in our lifetime.  Perhaps it was standing in line to buy an Elmo doll for our kids during the Holidays, or a must have limited supply trinket that sells for 10X its value.  .

We witness a tremendous amount of herding during extremes.  Current examples are the housing crisis and the current market swoon.  As intelligent animals, we should be able to see the herd for what it is, and make a rational decision based on facts and history. 

Part of our job as your Advisor is to ensure that we do not get caught up in the hype, that we do not invest your money with the herd. Whether that means limiting exposure in the dotcom boom or limiting the selling in this correction.  Currently, the herd is running and asking you to join them as they go over the cliff.  They are asking you to buy a tulip for $40,000, a 1 bedroom condo for $1,000,000 and to sell when the market is at its lows.  They are asking you not to believe in the world’s best economy when again and again, we’ve shown that we can, and will, work through a crisis.

I am not saying that our situation is all roses (or tulips!), but we need to keep our heads up, invest like Warren Buffet, buy like JP Morgan (“buy when there is blood in the streets”) and turn off the talking heads on CNN!

 - Scott Airey

Week of : 10/17/08

RED LIGHT.....GREEN LIGHT

A popular kids game, but when adapted to the market, is creating a chaotic investing atmosphere. The signals are confusing.  Up one day and down the next, red lights, and green lights.  What are we to believe and when will it be safe again to invest and trust the integrity of the market?

The answer lies with many factors, but the first "Green" sign will be LIBOR rates.  LIBOR stands for the London Interbank Offered Rate and is used as a measure of the cost that banks are willing to pay for bank to bank loans.  Usually, this rate is very low, as the risk to loan to another bank is very low.  In this credit crunch however, LIBOR has been as high as 3X the norm. This signifies that the perceived risk of Bank A to lend to Bank B is much higher (they may not get their money back!)  By increasing the rate dramatically, banks in need of cash either cannot afford it, or over the past weeks cannot find a bank willing to lend them cash.  The bank in need is cash strapped, word gets out, depositors run to remove their cash, and just like that, the bank in need is insolvent. 

Currently the 3-month LIBOR rate is 280 bps above normal (2.8%) and other shorter durations are approximately 2X higher than normal. Therefore the first green light on our destination to a stable market is for LIBOR rates to return to normal.  When this happens you will find that volatility will be reduced dramatically, as cash is more available to our banking system.  Currently this is not the case, so I am going to add my own color to the game, yellow light, which means that we will continue to invest with caution until the cash markets start to work again!

 As always, thank you for your business.

- Scott Airey

Week of : 10/14/08

HOUSE OF STRAW

Many of you are calling to ask if we should jump back into the market given yesterday’s 11% increase.  The answer is no, and the justification is simple. To use a double analogy, the Big Bad Wolf (United States) has a credit card (National Debt, Consumer Debt) and has been running up the bill for years;  the bill came due  4 weeks ago.  Now, the Big Bad Wolf warned that if we did not increase his credit line, he would huff and puff and blow our straw house down.  So, not wanting to be homeless, the credit line was increased, but the deal was that the Wolf needed to enroll in anger management classes and help us build a new brick house (regulations) in lieu of our current straw homestead.

The euphoria of our additional credit-line will be short lived, as the reality of our collective situation comes to roost.  Reality, in this circumstance, means that the rescue plans simply provide enough credit, which in turn buys us enough time (theoretically) to produce enough additional income, or asset appreciation, to pay off the bill in the future.  This, in a nutshell, is what the rescue plans amount to and we should be very leery of the optimism created over the last two days.

The rescue plans (US and Europe) were needed, but the bill is growing and will continue to grow.  We are betting on our future, and the potential (years from now) of an even greater problem if we do not see real GDP growth, real estate appreciation, and a strong productive employed workforce. 

The market was oversold last week and overbought yesterday.  We will continue to cautiously invest over the next 3 months to reduce overall risk to your portfolios and to garner some of the upside potential that the rescue packages are sure to create. The market will continue to be wildly volatile and we ask for your patience on both down days and up days.  Indeed, we have fortunately avoided our house being blown down, but the Big Bad Wolf is still lurking and the foundation for the brick house is only just started to be laid.

- Scott Airey

Week of : 10/09/08

VELOCITY

“Someone's sitting in the shade today because someone planted a tree a long time ago."    - Warren Buffet

Currently we reside in very tumultuous times.  I cannot help but think of what the history books will write about this current period.  Will it be significant or will this be just another correction, as the market and the world moves on?  As we live through the moment, it seems ominous, pervasive, without end and without equal. 

I am looking at the value of the market and indeed the underlying value of individual investments and am amazed at how cheap they have become, not because of lack of earnings, but the fear of reduced earnings and the fear of the unknown, which has produced the perfect storm of uncertainty.  Uncertainty makes every one of us uncomfortable, and the market is no exception.  Uncertainty breeds fear and fear moves markets.  There is no question that our economy is in decline and that the world’s financial system needs to be re-worked to reflect the velocity and complexity that makes up our systems.  To make an analogy, a pilot of a Cessna would have quite a bit of trouble piloting a stealth bomber.  The concepts are the same, but the means to the end are now incredibly complex.

Over the next year we will see oversight that is good and bad, but needed to advance the financial markets and to control the velocity of these markets.  The two competing keys will be to maintain the entrepreneurial spirit and ensure that socialistic tendencies that are currently pervasive are temporary. This generation’s call to arms will be to ensure, through our votes and our voices that the market is corrected, the bill is paid, and the next generation can build without worrying about our social and economical foundations. I believe that this can be accomplished by us and that big strides can be made over the next month to stabilize the markets.  2009 will be a rebuilding year and, perhaps, even part of 2010.  In that timeframe, the market  may  provide opportunities for those of us that believe that our system will not fail. 

Now is not the time to panic, but to use our experience in adapting to a different market paradigm, which I believe is velocity.  Like all investments, our economy has, and always will, run in cycles and either regress or appreciate to a mean number.  In my opinion, the only difference is the velocity in which this happens, the velocity of failures and the velocity of successes.  Over the past years, we’ve seen Google go from an idea, to a large-cap market dominator and we’ve seen Merrill Lynch take the opposite path.  To deal with this change, we will adapt our rules and tactics, but not our strategy.  It is important that we keep our heads, look for opportunity and have the willingness to execute.

As always we appreciate your business and, especially, your patience through these tough times.

- Scott Airey

Week of : 10/06/08

US VS. THE WORLD

Now more than ever it is apparent why the dollar is the world’s reserve currency. In the past several commentaries I have lamented about our process, our leadership or lack-thereof.  In examining the fiasco that is the European Union,  one must admit that in  comparison, we look like the model of efficiency.

Our markets will ultimately  be  the beneficiary of the tumult overseas.  What institution or government will  wait, hopeing the EU will pass a rescue program in a timely fashion, when we already have ours in place.

I don’t like our rescue package anymore than you, but it is necessary, and in a  few weeks time the benefits of being the worlds ecomonic engine and of taking these steps first will be apparent.  The landslide of capital coming into our system should greatly assist our efforts to recover.

I do expect a wild ride, but I also expect our markets to recover and benefit.  Warren Buffet’s buying spree  should give some comfort that the value is there -our market will not fail.

 As always, we appreciate your business.

- Scott Airey

Week of : 9/30/08

RUBY RED SLIPPERS

I certainly wish that we could click our heals and return to Kansas.  The market over the past months have provided a financial tornado of epic proportions which has lifted our markets and deposited them in a foreign land.  If I were to create a new allegory,  Dorothy’s house would land not in Oz, but into the rabbit hole of Alice in Wonderland.  The chaos that we’ve felt over the past several days is more like Alice’s teaparty than the yellow brick road.  However, we must realize that the bill, in some shape will pass, as even our “leaders” understand that the costs of not acting are enormous. 

Congress sent us reeling yesterday, as the crisis of confidence has now encompassed our elected leaders.  It is a shame to see partisan politics play a role in this crisis as $1.2 trillion in value was lost yesterday.  We continue to believe, with the support of the plan that the worlds markets will stabilize. Given the stabilization, we are seeing values in the market that could point to opportunity not seen in years.  Many sectors of the market are trading near or at 52 week lows.  We want to invest in areas that will hold their value even if our economy takes the “blue pill” and descends into the rabbit hole. Unlike our current situation, a return to normalcy will translate into price appreciation. We remain cautiously optimistic that the market will correct itself with the help of the recovery plan.

 As always, we appreciate your business and will keep researching and refining the portfolios to mitigate your downside and maximize your upside potential. 

- Scott Airey

Week of : 9/26/08

WHERE IS PATTON?

One of my favorite films was the 1970 film Patton.  The film chronicled one of our greatest leaders in one of our most dire national circumstances (WWII).  Events of the last 24 hours have me wishing for better representation, leaders with a mission and an understanding of the situation as it is presented.  Below is an excerpt from his famous speech…please excuse the mild profanity (left in for accuracy!)

"Men, this stuff that some sources sling around about America wanting out of this war, not wanting to fight, is a crock of bullshit. Americans love to fight, traditionally. All real Americans love the sting and clash of battle. You are here today for three reasons. First, because you are here to defend your homes and your loved ones. Second, you are here for your own self respect, because you would not want to be anywhere else. Third, you are here because you are real men and all real men like to fight. When you, here, everyone of you, were kids, you all admired the champion marble player, the fastest runner, the toughest boxer, the big league ball players, and the All-American football players. Americans love a winner. Americans will not tolerate a loser. Americans despise cowards. Americans play to win all of the time. I wouldn't give a hoot in hell for a man who lost and laughed. That's why Americans have never lost nor will ever lose a war; for the very idea of losing is hateful to an American."

Politics aside, both parties are playing Russian roulette in an attempt to garner favor for your vote.  While we are currently at war, there is another front being played out right here in America, and we need our current leaders to step up, outside of politics and pass some sort of remedy quickly. I am all for debate, as it is the cornerstone of Democracy, and I am confident that a measure will be passed, however it is painfully clear that the market will have to push our “leadership” to take action.  At the moment, it is clear that today’s market will open substantially down, and force the Governments hand into passing the resolution quickly. As Americans we like decisive quick action, and if Paulson were Patton, we would already have a measure approved; however the gears of Democracy are still working and investor patience will be rewarded.  I believe we will persevere, that the markets will regain their resolve, and the system will function normally in short order.

- Scott Airey

Week of : 9/19/08

WHAT A WEEK...

As of this writing, the futures point to an open in the Dow and S&P that essentially brings the market back to parity for the week.  I would caution all our clients that, just like the panic earlier in the week was overdone, the euphoria of the RTC/Government type bailout is equally overdone.  This weekend we will understand the specifics, and also digest the cost, estimated to be in the trillions.

We will be looking at the plan, deciphering its long-term effects and investing accordingly.  The market first must return to its basic structure of rewarding risk with return.  We still must come to terms with inflation, and a slowing economy, but my hope is that the markets will do so in an orderly fashion, which ultimately is the goal of the Government’s actions.

Political posturing aside, we will be entering uncharted territory as officials look to add regulation to the industry to try and prevent a re-occurrence of this crisis. But, by definition, a crisis is unexpected, and I very seriously doubt that regulation will have any effect other than increasing the costs of doing business.

We will continue to update you using our website and email as this is the most efficient way of quickly communicating our thoughts.  As always we appreciate your business and your patience through this tumultuous time.

- Scott Airey

Week of : 9/17/08

MARKET UPDATE

There has been concern over the past several weeks about the market, but lately I have heard, and am responding to the continued questions concerning Schwab and Fidelity’s money market.  To borrow a term from the 1976 Dustin Hoffman movie Marathon Man, “Is it safe?” According to the research we’ve done on both basic money markets at both firms, the answer currently is “yes”.  We will continue to due our due diligence on these investments and will keep you up to date with any changes that may occur.

- Scott Airey

Week of : 9/15/08

MARKET UPDATE

The financial markets are experiencing turmoil not seen in decades. This morning’s failure of Lehman Brothers, the sale of Merrill Lynch, the government buyout of Fannie Mae and Freddie Mac and the past shotgun wedding of Bear Stearns to JP Morgan, all point to a market that is coming to terms, though somewhat harshly, with its leverage.   The positives are that the market is becoming efficient and working out those companies that have proved to be weaker.  Darwin would be thumping his chest and the invisible hand of Adam Smith is passing over us as we speak.  Long term, this is what is needed, as the scales are being adjusted so that we can move forward.  The government cannot afford to bail out every company that fails and the consumer cannot afford to buy the economy out of it doldrums.  The market correction will cause the fog of uncertainty to slowly lift and form a more structurally sound base from which the market can build.  Further government intervention would have caused the potential for catastrophic event to increase in our future as the normal economic cycle would have been artificially thwarted.  Now is not the time to panic, as we feel strongly that these events are a long term positive to our economic recovery. 

- Scott Airey

Week of : 9/1/08

THE BEAR DECADE

While recently researching a mutual fund, I came across some depressing data. The particular fund I was interested in was launched in January 2000, and as I was reviewing its performance compared to the S&P 500 index, what I saw was shocking, to say the least.

Let us recall that time period: The S&P 500 was enjoying its arguably greatest run in history, with five consecutive years of 20% or greater returns, annualizing to an inconceivable 28.55%. This period was dubbed the "New Economy." No P/E ratio was too high, and actual corporate earnings were a mere afterthought. In hindsight, most people regard this time as the height of the tech bubble, and as the S&P 500 reverted to the mean, the market lost almost half its value. Another bull market ensued in 2003 during which time the S&P 500 rebounded nicely and climbed 16.13% annually from April 2003 through the market high in October 2007.

Then the credit crunch began, started to really take a stranglehold, and finally the markets tanked. The S&P is now down almost 17% through July 31. When considering the original market high, followed by the reversion to the mean, and then the proceeding recuperation resulting in the market high, what you have is an annualized return of -.04% from January 2000 through July 2008. Thus, with 17 months to go until the end of the decade, the S&P 500 index has essentially done nothing since the turn of the century.

As depressing as this walk down memory lane may seem, not all was lost these past eight years: Many asset classes actually performed well. For example, the Lehman Aggregate Bond Index is up 6.39% annually since 2000, gold is up 13.9%, and small cap stocks, as measured by the Russell 2000 index, are up 5.45% (despite having a few rough years).

The point of this summary is to illustrate that just because one asset class has a poor showing over a long period of time, there is no reason to believe that there aren't ways to maneuver the tough markets we now face. As your financial partner, we are knowledgeable about the multitude of varying opportunities and options to help you increase your wealth and we will provide assistance to enable your portfolios to flourish. Despite the currently difficult times, we will be working hard to ensure that the next decade for your portfolios will be far from bear.

- Rush Zarrabian

Source for Market Data: Zephyr StyleAdvisor
Past performance is no guarantee of future results.  The S&P 500 is an unmanaged index and you cannot invest directly into an index

Week of : 7/21/08

REAL ESTATE COULD PROVIDE STABILITY IN UNCERTAIN TIMES

In March, I wrote about the potential benefits of adding alternative assets to your portfolio.  The idea is that adding assets with low correlation to the stock market, may increase returns while reducing overall portfolio risk.  Today, I wanted to talk about one alternative asset, real estate.

I already know what you’re thinking.  Real Estate?  In one of the worst housing markets in decades?  But if you dig a little deeper, you may find that an allocation to real estate may offer diversification and steady income that could help a portfolio during these unsettling times.

Many types of real estate are not subjected to the same kinds of issues or market conditions faced by owners of residential homes and/or property.  For example, in the area of healthcare, you could invest in office buildings of hospitals and doctors.  In this type of investment, income is derived via rent collected from the tenants.  In addition to this, hospitals and doctors have traditionally been consistently responsible and stable tenants, increasing the likelihood that they would provide a steady stream of income.

Demographic trends can also play a role when investing in real estate.  As baby boomers age, there is a thought that many of them may “downsize” their homes and move to a more southern location.  Investing in apartment or multi-family properties could be a way to capture these changes.

Investing in real estate does not necessarily mean that you need huge amounts of capital.  There are several ways to gain exposure to the real estate and make it a part of your portfolio.  If you have any questions or would like to discuss this further, please contact a member of our team.

Whatever you decide, always remember that an allocation to real estate, like any investment, should be viewed from a total portfolio perspective.  Real estate may not be an appropriate investment for everyone.  Like many investments, it is subject to market fluctuations and losses are possible.  Past performance is no guarantee of future results.  If you would like to discuss an allocation to real estate within your portfolio, please contact a member of our team.

- Rush Zarrabian & Matt Gaffey

Week of : 6/30/08

MARKET UPDATE

The markets have been painful.  As of this writing, we’ve had the worst June since 1930 and the S&P is down 12% YTD.  All sectors are down with the exception of materials and energy (7% & 1.6% respectively).  We’ve been able to mitigate the markets weakness through our core alpha approach, but have witnessed the market’s sentiment go from slightly “bullish” to predominantly “bearish” over the last three – four weeks.  The cause has been the relentless credit markets, reduced earnings, and high inflation.  Oil is at $142 per barrel and the consumer is starting to feel the pinch at the pump and the grocery store. 

The good news (and there is some) is that unemployment has held stable and GDP, although low, is positive 1%.  When comparing the sheer size of the first paragraph and the 1-sentence description of the positives, it becomes easy to understand why the markets are suffering.  It is very difficult to work a day without being reminded of our economic downturn.  The news agencies (both electronic and paper) realize that negative news sells and love to add fuel to the fire that is burning.

The most important factor in these times is to keep your perspective and not buy into the panic that most people feel.  The average investor buys and sells at the wrong time. You guessed it…buying high and selling right now. JPMorgan just released statistics that show the average investors return (calculated by net aggregate of mutual fund inflows, outflows and exchanges) over the last 20 years is 3.5%.  This is substantially less than the S&P’s average return of 10.6%, bonds 7.7%, Homes 4.2%, and Gold at 3.4%.

The question I most often receive these dark days is “how long will this last”?  The average recession is 11 – 14 months.  In my view,  we are 1/3 to 1/2 way through.  The problem is inflation, and the remedy is higher interest rates, which the Federal Reserve call ill afford to enact.  My feeling is that Bernake will wait until 2009 to start raising rates, which will start the healing process for the economy, but will limit the market’s upside potential.  We are looking to March - June of 2009 for the return of a more stable, growth oriented market.  Until then, we will most likely experience quite a bit of volatility in the 3 – 4 quarters leading up to that point. 

Using history as our teacher, we know that the markets can and do correct themselves more efficiently than Government sponsored intervention.  It is my hope that the Federal Reserve does not get involved in election year politics and offers more stimulus to the economy.  This will only elongate and make more severe the problem in the future, that should be addressed today.

The market can supply a positive return in a less than stellar economic environment.  In order to reap positive returns, we need to be steadfast in our approach and not subject ourselves to the vagaries of the media.  It is more difficult now than ever before, as the market’s volatility is increasing every month and news of the same is delivered instantaneously.  While we will prune and reduce positions in some areas, we feel strongly that now is not the time to sell and go to cash.  In fact, it may be one of the best buying opportunities in the last 10 years!

- Scott Airey

Week of : 6/16/08

SKYROCKETING OIL PRICES: HOW CAN AND INVESTOR BENEFIT?

Unless you’ve been living under a rock, you may have noticed that oil prices have doubled in the past year, and like me, you may cringe as you watch the prices at the pump become increasingly more difficult to bear.  Everyday, the focus is on the escalating price of oil and gasoline; however, as an investor, we can focus our attention on opportunities that may help cushion the blow.
Before we get into the investments, let us briefly look at 3 cited reasons for the increase in the price of oil: 

1)      Basic Supply and Demand – Oil is a non-renewable resource and the world population continues to grow.  Emerging market economies are growing richer and their demand for oil is increasing.  Economics 101 – when demand exceeds supply, prices go up.

2)      The Weakened Dollar – Oil is traded in U.S Dollars. The dollar has weakened against major foreign currencies over the past several years and the combination of the strength of the euro, increased opportunities in emerging markets, and continued uncertainty in the US is preventing those dollars made from oil sales from flowing back into the US Capital Markets, further weakening the currency.1

3)      Speculators – By bidding up the price of oil through the use of futures contracts, speculators are betting that things are only going to get worse.
Are oil prices too high given everything that is going on?  No matter what predictions you may hear, the real answer is that nobody really knows.   Oil, like other commodities, does not truly have an intrinsic value, because it is not a cash-generating instrument like a bond or a stock. The price is what it is, and you cannot escape it.  You are not only paying at the gas pump, but also in the form of jet fuel (increasing the cost of air travel), and even things like a bottle of water may end up costing more (oil is used to make the plastic).

You can, as an investor, try and at least increase your wealth through energy investments.  As of June 16, energy was only one of two sectors of the S&P 500 to have a positive gain for the year.  There are ample opportunities to benefit from price increases, both in the short and long term.  The 3 basic investment options available are a commodity or oil Exchange Traded Fund, a commodity or natural resource mutual fund, or investment into a specific energy stock.  What you decide depends on how much direct exposure you want to oil prices.  If you think that we will see $200/barrel oil by the end of the year, then investing in an ETF that directly tracks the price of oil may be the best way to capture the gain (be prepared for volatility though!).  Alternatively, an investment in a mutual fund will give you exposure to various energy companies.  These companies can also benefit from price increases, although more indirectly.  On the other hand, direct investment in a company's stock allows you to choose what type of energy company you want to invest in, but it will also increase your exposure to specific company risk (if a company is poorly run, oil could go to $500 a barrel and the stock may still under perform).
By adding some of the above-mentioned products to your portfolio, your next trip to the gas station may not sting as much.  As with any other investment, it should be carefully selected and be just one part of a well diversified portfolio.


- Rush Zarrabian

1 "Weak Dollar Central to Oil Price Boom"

http://www.cnbc.com/id/20988001/

Week of : 3/10/08

WHY ALTERNATIVE ASSETS MAY NEED TO BE A PART OF YOUR PORTFOLIO

Given the tremendous amount of volatility in the markets recently, many investors are starting to look beyond the traditional method of investing in stocks, bonds and cash for their returns. This is the perfect time to discuss an emerging asset class that has been getting a lot of attention lately, Alternative Assets.

Alternative Investments include things like commodities, hedge funds, inflation protected securities, and real estate.

The key to these investments is that they historically have had low correlation to the more traditional types of investments. This means that these type of investments may not necessarily move the same as the stock or bond markets. (i.e. Although the stock market has struggled since reaching a high in October, many hard assets, like energy and precious metals, have actually had gains. When added to a portfolio containing more traditional investments, alternative assets may help reduce the overall portfolio risk and increase returns.

Although many people like to group alternative assets together when classifying them, the categories within the alternative asset class tend to have very different expected return and risk profiles. Private Equity is very different from Commodities. Art and rare coins do not have the same risk/return profile as Real Estate. Alternative assets like hedge funds, private equity and timber are not easily available to most investors, but there are still many alternatives available through a wide variety of mutual funds or ETFs.

Some alternative assets may work well in conservative to moderate portfolios, while others require larger investments of capital and have considerably more risk. The amount you are willing to invest, your return expectations and your risk tolerance all contribute in determining if and what alternative investments may be right for your portfolio.

- Rush Zarrabian

Week of : 2/4/08

WHY "SIN" MAY BE IN

In the VZN Market Commentary from January 21st, we mentioned an area that we were concentrating on in many of the portfolios was "Sin".  Things that fall into the Sin category include Alcohol, Tobacco, Gambling, Defense and Fast Food.  Let's examine why this area might be a good investment during hard economic times. The theory behind investing in Sin is that the demand for these types of products is inelastic. This means that regardless of how the economy is doing, people will continue to buy these products. Whether things are going great or lousy,  people will continue to drink, smoke, gamble, etc.

One of the first things you will notice is that many of the companies involved in Sin products, hold a serious competitive advantage that helps protect them against price reductions. It is not easy to develop a new line of tobacco products, start-up a casino or mass market a new beer. Strict government regulation and/or oversight discourages new companies from entering the marketplace.  Another competitive advantage is strong brand recognition. Although you may not recognize the name of the world's biggest producer/distributor of alcohol, you have heard of Smirnoff, Captain Morgan Rum and Guinness. Similarly, you may not be familiar with the name of one of the world's largest restaurant companies, but you have driven by many of their franchises (among these restaurants are Kentucky Fried Chicken, Taco Bell and Pizza Hut).

Another intriguing development in Sin is global expansion. As middle classes expand in emerging markets, the demand for Sin products also increases.  For example, more people have visited the casinos of Macao than those in Las Vegas.

This is not saying that Sin does not have risks. On the contrary, many of these industries are subject to lawsuits and heavy government regulation, which could reduce profit margins. Trends may also have an impact. The recent "low-carb" craze had many fast food restaurants spending millions of dollars marketing and creating new carb friendly foods, only to discontinue those items soon after due to lack of consumer interest.

Like any investment strategy, you should not invest in a Sin company and automatically expect immediate success. However, there are mutual funds available that invest in Sin as their primary objective. These funds can provide an opportunity to allocate money to this strategy without having to worry about individual company performance.

- Rush Zarrabian

Week of : 1/2808

The S&P 500 was down 9.38% YTD as of Friday, January 25. This is the perfect time to look back at other years where we have seen major shifts in the S&P 500 over a short period of time and analyze what followed. Here are the statistics for the 5 worst months of that have occurred in the past 20 years.

As you can see, some of the bad months were just blips in an overall uptrend, while others contributed to losses over the entire year. However, looking at only the numbers is not enough. To fully understand what was going on, you also have to look at the economic conditions and what news was relevant at the time. For instance, by September 2002, the tech bubble had long burst and the market was finally bottoming out. At this point, the S&P was off almost 50% of its March 2000 high. The overvaluation of the market was enough to contribute to the major declines. Add in the recession that occurred the previous year and the attacks of 9/11, the combined affect was just devastating.

When looking at other time periods, August 1998 and October 1987 were prime examples of blips in an uptrend. The economy was doing well during both of these periods, but certain events triggered enormous fear that caused them to decline by large numbers. In 1998, Long Term Capital Management (previously a successful hedge fund) failed and their unraveling was thought to completely turn the market upside down. In 1987, a combination of overvaluation, fear, and program trading caused the big declines. Both of the drops came in the midst of economic growth and the market rebounded.

It is very easy to get caught up in the mess when we have months like this. But this exercise has allows us to keep things in perspective. That does not mean the markets will definitely rebound, nor does it mean that they will continue to decline. It means that this is one month of an entire year and does not necessarily define what will happen going forward.

- Rush Zarrabian

Week of : 1/21/08

A CLOSER LOOK AT RECESSIONS

To follow up on last week's VZN Market Commentary, we wanted to take a closer look at recessions of the past. There has been a lot of talk these past few weeks that we have already entered into a contraction period in our economy. This makes it a good time to analyze the past and determine what can be learned from previous recessions.

A recession is defined as a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. By this rule, the economic downturn of 2000-2001 was not a recession. Although this period is often referred to as a recession, it does not meet the definition due to some of the quarters being "up" (GDP declines only occurred in the 3rd quarter of 2000 and the 1st and 3rd quarters of 2001). Contrary to the definition, common sense would indicate that a recession had occurred when the tech bubble burst and the terrorist attacks of 9/11 drove fear into the markets.

There was an interesting article in last week's Economist(1) that presented a historical correlation between the number of articles in several newspapers that mention the word "recession" and an actual downturn in the economy. It seems that this "R-word index" successfully predicted the last 3 major economic downturns (1980, 1991, and 2001). There has been an increase in the index since the end of 2007, but has yet to reach previous heights.

Another important figure to include when determining if a recession is occurring is the rate of unemployment. Consumer spending accounts for 70% of GDP. Theoretically, if there is a higher number of people that are employed, there will be more money out there to spend and keep the economy churning. Currently, unemployment is still historically low, but it will need to be followed closely in the months ahead.

No one really knows for certain what is going to happen and there is still debate over how much growth will slow. The good news is that recessions seem to be shorter and shorter each time they occur. As mentioned in last week's article, the time period of recovery has gotten shorter on average over the last 50 years. This does not mean that the next one will be shorter for sure, but it may indicate that the economy is more dynamic than in years past. With the Fed lowering interest rates this week by 0.75%, the hope is that the slowdown in growth will not be prolonged. We will continue to monitor the situation and respond as necessary.

- Rush Zarrabian

(1) The Economist, "Warning Lights", Jan 12-18, 2008.

Week of : 1/21/08

BERNANKE AND BUSH

Last week we fell victim to politics. In listening to Bernanke's speech early last week, I was absolutely surprised at the selection of words and the obvious political purpose of his speech. Before Bernanke spoke, the DOW was up 65 points. Five minutes into his speech, the DOW was down 150 points. By the close of the market, the DOW had dropped 300 points. His purpose was clearly to supply an impetus for our leaders (yes, I do find writing "leaders" difficult) to pass an economic stimulus package for our economy. I find it troublesome that the head of the Fed would bow to such political antics and question whether his actions are the result of his personality (candor) or his "employer's" wishes. I use the term "employer" loosely because the Federal Reserve has always been defined and touted as an independent agency. Its purpose, accordingly, is to stimulate economic output and maintain low levels of unemployment, independent from political pressure. In my attempts to research the Fed and its overall objective, I did not find the term "political puppet" in its hierarchy of responsibilities.

To that end, it is still my opinion that we have reached a trough, that the recovery period for our economy will be 12 full months and, in that timeframe, very few sectors of the market will be performing. With that, we are keeping our concentrations in Sin, Energy, Utilities and an overall International allocation. I see a need to change the International focus in the latter part of 2008. This will be the result of the Dollar strengthening as our economic troubles recover and the Administration supporting the Dollar in the open currency market.

- Scott Airey

Week of : 1/14/08

This past week we have been truly tested. The market seems to be taking on water, as the waves of the sub prime storm have not abated. Especially in these troubled times, it is very important to keep perspective and make sound decisions based on facts, not emotion.

Since 1958, we have experienced several recessions and while the severity of each has varied, the trend has been shorter and shorter recession or recovery cycles. The late 50's saw a 16-month recovery duration. In the 80's, we worked through 11 months and in the 90's, the cycle was 6 months. While I am not in the group that believes we are heading toward a recession by definition, the reality is that most of the economy has slowed to the point that the media deems it necessary to speak of the sky falling every morning, noon and evening. I have yet to hear, from any publication, that economic cycles are normal for a healthy economy and that the laws of expansion, profitability, contraction and recovery (or recession) have played out over and over again. The only question left in my mind is the duration of our recovery period.

There are many scenarios that could paint a bleak picture of an elongated recovery and potential recession. Bernanke's efforts are having an effect, but with each rate cut that passes, the effectiveness is reduced. At some point during the mid/latter part of 2008, Bernanke will run out of policy "arrows". If the market has not stabilized from the efforts of Bernanke and the administration when this occurs, then I believe we will see a long recovery that may give way to a recession. The "tipping point", to borrow from last year's popular book title, will be in the next 90 to 120 days. In this time period, we will see the last of the big write-offs from our financial institutions, cash will or will not be garnered from overseas to help Merrill and Citi and Bernanke will have made an interest rate reduction once, if not twice.

- Scott Airey