January 2009

John and I have never been so happy to ring in a New Year! The year 2008 was one of remarkable change for our nation and our financial markets. Here’s a list of what we learned in 2008:

• “When in doubt, bail ‘em out.” It doesn’t work, but it sure sounds heroic.

• Esteemed Federal Reserve Chairmen are ordinary people making extraordinary mistakes.

• Hell hath no fury like the consumer scorned

• Having a mortgage is no different than paying rent. Tired of paying? Move on.

• Free market capitalism is an oxymoron, and Henry Paulson is just a moron.

We are afraid that we have not yet seen the full brunt of these lessons, and that 2009 may bring even more dismal economic news. Let’s use our family Christmas as an example of why we believe this. Instead of jewelry, I asked Santa for a small garment steamer from Target. Instead of a home based backup power supply, I splurged and bought John a deep fryer….at his request. It’s not that we can’t afford the other items. It’s just that after the turmoil of the last year we sat back and asked ourselves, do we really need it? OK, we might need the back-up power supply… Many of you have shared similar stories with us. Take this scenario and multiply it times the millions of Americans who are behaving the same way.

It’s not the people who are walking away from their homes who need help from the government. Statistics show, even a workout often ends up in a walkout. It’s the rest of the Americans who are faithfully paying their mortgages who need to feel better about the future of our economy, their taxes, and their livelihood before they start spending again. It’s not the people who are broke that will turn the economy around, nor is it the banks who are hoarding cash after creating the mess we are in. It’s those of us that have willfully altered our standard of living, and probably won’t get a break, that will survive to consume another day.

For these and many other reasons, we remain hunkered down in our portfolios with low equity positions and defensive assets. John and I are forecasting that the US equity markets will decline substantially below their November lows. We also think that US Treasuries will sell off dramatically, as the consequences of printing money come to fruition. We have increased our high yield bond fund, and increased our bear market fund to lessen the impact of further declines in the market. Although gold bouillon is not doing much at this point, we are forecasting a price of gold in excess of $2,000 per ounce before this is over. We also have plenty of cash on the sidelines to act as a stabilizer, and also as a source to buy low-priced assets at the right time. It just might take a little while.

We are diligently maintaining an eye on all events that are relevant to the financial future. Preserving capital and its purchasing power is our number one priority. Because of the strategies we deployed in the last four months, the markets have fallen far below us and we do not have to take undue levels of risk to recover. We also have a much shorter distance to get back to where we were 14 months ago, and will most likely return there long before the equity markets will. Our long-term perspective is very optimistic, but for now, slow and steady wins the race.

John L. Brotherton, CFP™
Donna K. Brotherton, CFA