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November 2008

Thanksgiving Day is rapidly approaching and I am truly thankful that I chose 21 years ago to take charge and begin helping my clients manage their investment portfolios! We are currently experiencing one of the most severe Bear Markets that this country and the world have seen in the past century. As of November 12 the broad stock market in the US was down almost 46% since October last year. We now have another great example of how our “Active Management Strategies” have significantly reduced market losses and we continue to substantially out perform the stock market for the past 10 years. You can rest assured that we are carefully watching the situation and have your portfolio in an extremely conservative position. We are not effectively in stocks at this time and will maintain this position until we are convinced that it is time to make further adjustments.

During the past few weeks I wrote an article about “Active Management” which was published on several dozen websites and search engines last week. I thought you would enjoy reading it so we have included it below.

We wish you and your family a wonderful Thanksgiving Holiday!

Sincerely,

Phil Couture
President, CFP®

Active Management Key to Surviving a Bear Market

Looking for a winning strategy in today’s tough financial marketplace? You might try following singer Kenny Rogers’ advice in “The Gambler,” his big 1970s song: “You’ve got to know when to hold ‘em and know when to fold ‘em.”

In a volatile world, it no longer makes sense for investors to follow a passive “buy–and-hold” strategy, waiting for those stocks to increase in value through the years.

Instead, you should consider an active management style for your portfolio, taking steps to reduce your losses in a declining market and preserve your capital so you have more to invest in the future. It’s a flexible approach followed by many savvy investors, including T. Boone Pickens, the legendary Texas entrepreneur, who recently told a CNBC interviewer he moved his holdings completely into cash a few weeks ago.

For many decades, investment professionals have debated whether a passive or active management approach delivers higher returns. The theory behind a passive approach is that no one can “time the markets” – forecasting upward or downward moves – so an investor might as well hold onto those assets indefinitely. Of course, real life isn’t that simple and even passive investors may need to make adjustments in their portfolios from time to time.

Another type of passive strategy is the “fixed allocation” approach. That means an investor and financial advisor or 401(k) provider devise an individual portfolio based on a desired rate of return and ability to tolerate risk. It’s a sound approach that forms the foundation for most successful investment plans. However, the allocation among types of assets – stocks, bonds and cash, for example – doesn’t vary, even if there is a significant change in market conditions.

But Paul Samuelson, an MIT professor and one of the nation’s leading economists, has pointed out the big problem with a passive strategy: “The longer one holds a stock, the more certain it becomes that he will encounter a significant market upheaval. Risk does not go down with time, it goes up!"

That’s certainly true with Wall Street’s market cycles, According to a study by NDR Research, there have been 33 bear markets since 1900 as measured by the Dow Jones Industrial Average. The median decline has been a drop of 26.9 percent over a period of 363 days. This year, the Dow fell 29.9 percent as of October 6, the 363rd day since its most recent market peak. Unfortunately since October 6th it has fallen an additional 10.16% as of November 7th which makes it one of the most severe bear markets in the past 100 years.

For most investors, the worst pain in a bear market comes from seeing the loss of principal in their accounts, such as when a stock worth $50 a share falls to $25 a share. But there’s another type of loss that doesn’t show up on the monthly statement, but can be even worse. Inflation reduces the purchasing power of your assets over time – a major drawback to passive investing.

Looking back over the past eight years, inflation averaged 4.4 percent annually. Therefore, investors needed an overall gain of 26.1 percent from September 2000 to October 2008 just to maintain their purchasing power. However, a typical investor who maintained a fixed allocation portfolio actually lost 30 to 35 percent, according to statistics from STIR Research News.

With the President-elect and Congress debating a new stimulus on top of the $700 billion bailout and the high level of U.S. debt, inflation is almost certain to return at some point in 2009. And investors will need to adjust their strategy once again to address this threat.

For investors, the conclusion seems clear: an active management strategy is best suited for today’s fast-changing global marketplace.

October 2008

At the beginning of the last week of September, our technical parameters began to show the potential for a short-term rally that would allow us to experience some profits for a few weeks prior to another leg down.  Even though there are still many problems in the economy, it appeared that the regulators were getting things under control for at least awhile.  Unfortunately NO ONE thought that our Senators and Representatives could have been so stupid as to play their usual games considering the circumstances we are experiencing, but they did.  Those actions caused us to have a short term reversal.  However, we are still way ahead of the broad market – as usual – and have moved back to a very conservative position for the time being.  There is no magic that tells us the proper strategy, so we utilize all the analyses that are available to us and allocate the portfolios actively with that information.  We tend to be correct far more often than not and, as a result, our investment results continue to be excellent over the long term.

Now that Washington has finally passed “something,” it is probably too altered and too late.  The credit markets have gone crazy.  Even larger institutions cannot raise capital on competitive terms.  General Electric is an AAA-rated company, yet they had to pay Warren Buffett 10% to get $5 billion and in-the-money warrants worth at least another 10%.  Buffet is likely to double his money on this deal over 4-5 years.  A short while ago, GE could get short-term commercial paper for a few percentage points.  That difference is going to significantly impact GE's bottom line.  But, they had no real choice.  They took the money.  How quickly the Rescue plan will produce results is yet to be seen.  There are other issues such as rising unemployment and a slowing economy in addition to the credit crises.  At least now, the “prescription” has been signed into law and the application of the “medicine” can begin to be digested by the financial markets.

I think that we still have a long way to go before we are “out of the woods” with this Bear Market.  The last Bear Market from 2000 to 2003 was just simply over the “Tech Bubble”, we now have a lot more issues at stake with a Housing Bubble, Credit Bubble, Domestic and International Economic Slowdown and Commodities Bubble all breaking at once.  It isn't’t logical to expect that the latest Band-Aid will suddenly turn all of these circumstances back into a positive direction.  Therefore, we will have a lot more opportunities to generate profitable trading in the market over the next several months and into the future. 

You will be receiving your quarterly portfolio evaluation in a few weeks.  As always, if you have any questions or would like to discuss anything with me, please call the office and schedule a meeting or phone conversation at the earliest possible time.

September 2008

The week of Sept. 15-19, 2008 will certainly go down in history as one of the most remembered weeks on Wall Street. We are in more dynamic times than most would like to admit. Many will say that the Long Term Capital Management bailout in 1998 was but a warning shot of things to come. However, lever¬age and herd mentalities have been around quite a bit longer.

The Largest Financial Bailout in US History is forthcoming! The Federal Reserve made an emergency move to protect money market funds and temporarily banned short selling for a specific list of financial companies (do you believe 800+?). Furthermore, the Treasury department is asking for full discretion in buying up bad debts from banks across the nation. Clearly, the Bear Stearns deal six months ago, the Fannie and Freddie move two weeks ago and the recent AIG and Merrill deals were not enough to stave off a meltdown. Even after all of those moves last week, many financial companies were “ceasing to operate.” The market was literally freezing! The amount of commercial paper being issued was in free fall and that paper is the lifeblood of the financial and business world. Without it, commerce would soon grind to a halt, ceasing to be able to operate.

These are unprecedented happenings in the history of the US financial markets. In typical “Crisis Only Management” fashion, the government apparently will temporarily lay aside their “get nothing done partisan politics as usual” this week to decide that it is the “better of two evils” to have the taxpayers “once again” bailout the build up of irresponsible actions of the financial institutions. Apparently, they will be giving them “Get Out of Jail Free” cards and allow them to dump all of their bad debt that no one else will buy into a “Taxpayer funded Trash Can” with price tag estimates for the taxpayers ranging anywhere from $500 billion to as much as $1 Trillion dollars! Furthermore, they will also be given a temporary “hall pass” that won’t allow anyone to “short” their stock as they are “packing their bad debts down the hallway” to the publicly funded Dumpster to be given some sophisticated name like “National Trust Fund” or whatever they decide to call it.

The rationale being given to the taxpayers is that this is necessary to restore confidence for the financial system to operate. Maybe if the government would spend more time “fixing the problem” instead of “fixing the blame,” and worrying less about “who gets the credit” for it; they could actually have rules in place to prevent these problems in the future. Much of the information above came from one of our Technical Analysts, David Wilhite. I liked his phrasing so much that I used some of it verbatim. We are remaining in very defensive positions until we see better evidence that this “Bear Market” may actually be ending.

If you have any questions, need assistance completing the survey you received awhile back, or just would like to talk with us, please do not hesitate to call or send an e-mail and we will respond with our usual promptness.

August 2008

We almost made it through August before our first major storm of the season.  It seems that we have escaped another bullet {Tropical storm Fay}.  I have heard many times that the Indians from many centuries in the past would come here to avoid these storms.  Perhaps their ancestors knew something that is apparently not common knowledge in modern times.

During my more than 20 years of direct asset management, I have experienced four bear markets.  Even though the current one is not yet the largest in terms of dollar losses, it has certainly been the most difficult to analyze.  As you know, for the past year, we have had an amazing number of economic problems.  This has caused a greater amount of volatility in most investment portfolios; which, in turn, has caused many of us to feel a much greater level of discomfort than we expected.  This experience has also caused us to realize we should be more conservative in the level of management risk that we choose.  Recently, we sent you a “Risk Survey” to assist us in determining whether the current management level in your portfolio is correct and, if not, how best to modify our management of your assets to more closely match your comfort level.  If you have not already completed it and returned it to us, please do so immediately.

During the past year, I have been doing extensive research on additional management strategies that we can add to our techniques in an effort to better control the potential short-term downside market fluctuations.  Over the next few months, we are going to adjust our strategy to include a portion of the accounts in core funds and conduct the more active adjustments around those core positions.  I believe these modifications will be very effective in reducing the volatility, especially in our more conservative portfolios.

Having said all of that, I am very happy to report that in spite of the current short-term market frustrations, our management strategies continue to provide much better risk-adjusted returns for our clients.  We have just finished the reconciliation of our collective performance for the past 10 years ending June 30.  The S&P 500 Index for that period had a total return of 2.8% and our combined account average was approximately 40% greater with considerably less market volatility risk.  This analysis included all of the client accounts that have been under our “Active Asset Allocation Management” for the entire 10-year period.  This is, of course, another excellent example of how effective the “Active Management” approach can be.

Thank you for your confidence in us.  We continually strive to improve the level of our services for you.  If you have any questions, need assistance completing the survey, or just would like to talk with us, please do not hesitate to call or send an e-mail and we will respond with our usual promptness.

July 2008

We are now in the second half of the year and at the risk of sounding like a broken record “I can’t believe that the year is half over; can you?” I hope that you are having an absolutely wonderful year so far!

The first thing that I wish to cover in this letter is to remind you to notify us immediately if any of your circumstances change to the extent that a change in our management of your investments would be necessary. This is part of our company policies and in line with the regulatory procedures that govern our industry. In addition, I want to hear from you any time that you wish to make any changes in your portfolio or place any reasonable restrictions on the management that we provide.

It is our desire to provide you with the finest service available and part of that process is clear and frequent communication. In an effort to be sure we provide the most appropriate management of your accounts, we developed a portfolio survey to assist us in making sure that the risk controls we are using are correct for you. Enclosed with this letter you will find our “Risk Tolerance Portfolio Survey” and a return envelope. Please take a few minutes to complete and sign it at the end and return it to us ASAP.

Over the next few weeks, we will complete the audit and reconciliation of last quarter’s activity in your investment accounts. As soon as we complete that process, we will forward your quarterly management report as usual. I am sure that you will be extremely happy with the results we are achieving for you. This is especially true in light of the continued market decline. As of the date of this writing (07/16/2008), the domestic US stock market is down approximately 23% from it peak on October 9, 2007. This is another great example of the benefit of our “Dynamic Active Investment Management” and how it can protect your portfolio from the ravages of a Bear Market!

It seems that it’s a little difficult for a longer-term rally to gain much “traction” when it’s trying to do so on an “oil slick” of $145 per barrel and the “slippery slope” of the FANNIE and FREDDIE mortgage lender problems that have surfaced over the past few days. They represent over 50% of U.S. mortgages and are running into serious capitalization problems to the extent of likely government intervention for them to continue operations. There are many problems in our economy of which the above are only a few examples. Until these factors run their course, it is not likely that the investment markets will be able to recover. As always, we will continue to monitor the situation and adjust your portfolio to maintain its safety factors. When the markets begin to recover, and, of course, they will at some point, we will be ready.

We appreciate your trust in us and take those responsibilities very seriously! I am always available to respond to your needs.

June 2008

Hello my friends. I hope that you are having a wonderful June and start of summer! This letter is the first of a new monthly communication we are beginning. In an effort to keep you better informed, we are going to send our update of what is happening that has (or will have) a potential impact on your investment portfolio and financial circumstances. I believe this information will help give you a stronger comfort level with the management that we are providing for your assets. Below you will find some very interesting facts.

What Do 4/05/1999, 3/23/2000 and 6/24/2008 Have In Common?

• The S&P 500 Index first closed above 1314 on 4/05/1999, and that is where it closed yesterday (06/24/2008)!
  
• Add in dividends and you add a year: the S&P with dividends is worth the same today as it was on 3/23/2000.
  
• Either way, eight or nine years of no growth. It doesn't’t have to be that way. ‘Buy and Hope’ (hold) just doesn't’t pay off. You need to have the flexibility to change your asset mix along with changing market and economic trends which is exactly the service that we provide for you.

Recession: Still Looming?

The official definition of a recession is two consecutive quarters of negative growth. That has not happened, officially. During both the 4th quarter of 2007 and 1st quarter of 2008, the U.S. economy definitely slowed, but did not turn negative. To many this signaled that we may have escaped the worst and have better times to come.

But maybe we shouldn't’t be celebrating missing the bullet too soon. Consider the following:

• The Consumer Confidence Index tumbled almost 8 points in June to 50.4. This is its most pessimistic assessment since 1992 and one of its lowest readings ever! The only other times it was lower was 1974-75 and 1980 (ugly stock market years, not coincidentally).
  
• Not only is the Consumer Confidence Index at a low but it has fallen 10 of the past 11 months, and is the deepest/sharpest 12 month deterioration on record!
  
• Consumer home buying plans dropped to only 2.2% which is the fewest since October 1982. For some perspective, mortgage rates in 1982 were a stiff 15% for those qualifying. So it isn't’t high interest rates that are discouraging today’s buyers.
• Another fun statistic is a record low of only 35.8% of families expect to take a vacation in the next six months: not good news for lodging, gaming, resorts, airlines and restaurants.

If the normal IRS tax refund checks and the economic stimulus package don’t lift consumer confidence, it may be we are just now starting with a recession.

Unfortunately, the market keeps getting hit with bombshells. As of today we are testing the March lows on the S&P 500 index, down almost 13% year to date. Obviously the worst hit sector, financials, now below their March lows are pulling down the S&P 500 and large cap value, where they have heavy weightings. 

The broad based Market Environment Indicator remains bearish. As a result of this and many other indicators and analysis data we remain very cautious. We have reduced our exposure to stocks again and have taken a conservative hedging position in most portfolios through the use of market shorting funds. Even though everything is down right now (even bonds), your portfolio with us is in much better shape and only down a little!

We are working toward doing more corresponding via the internet and e-mail so that we can communicate much more rapidly and at the same time kill a few less trees by not sending paper copies. If you have a regular e-mail address and use it consistently we would like to transition to sending as much data as possible through this medium. Please let us know if you would like to participate in this endeavor with us. 

Please e-mail Lance at MLance@CoutureFinancial.com or Phil at PhilC@CoutureFinancial.com and provide your preferred e-mail address information.

As always please do not hesitate to contact me if you have any questions or would just like to talk to me. Until next time have a great day!