4th Quarter 2008

Market Health Outlook
We had a difficult and interesting year in 2008. We have had extreme volatility. We have seen disastrous stock price setbacks caused by consumers’ excessive use of debt and corporate greed. I also believe we are seeing the first stage of a shift away from a free market capitalistic economy. In addition, we experienced a historical election, the ramifications of which are yet to be determined. I won’t bore you with a more extensive review of the events of this past year, except to note that I did express some concerns over sub-prime issues in the past, but in no way anticipated the magnitude of the problem.

No asset classes were immune from losing value in 2008, as stocks, bonds, gold, oil, and international investments all fell in unison. Many fundamental core beliefs on how the financial world operates have been challenged. The most important unresolved core belief is whether this crisis is really different this time. Often, when we are faced with circumstances that appear overwhelmingly positive or negative, we adjust our strategies based on the assumption that “things are different this time”. The flip-side argument is that “there is nothing new under the sun”, or “we have experienced all this before”. As I will explain throughout this letter, I continue to have some legitimate concerns and will be making some long term adjustments, with caution.

Economic Factors for Growth.
In the past seventy years the stock market has returned over 10% per year and bonds have returned around 5%. Over time, this compounding “excess rate of return” provided by stocks is substantial even considering these cyclical crisis points. This excess rate will continue, but it will be much narrower in the future. My favorite President, Mr. Ronald Regan, set the economic stage in the 1980’s by lowering tax rates and encouraging less government regulation. Corporate profits expanded, and thus, stock prices increased through lower taxes, low government intervention, and the ability for corporations to access capital at low rates. These three factors ushered in tremendous economic prosperity for America.

Due to our recent debt crisis and corporate greed, these three favorable factors will be substantially diminished making it more difficult to achieve the high rate of excess stock’s gains of the past. The new administration has made it clear that tax rates will be increased. Even if the administration does not desire to raise taxes, it will be mandated to do so by the trillions of dollars of debt we are incurring to salvage the mess on our hands. Interest rates for corporate loans will increase as the risk premium has been reset higher and the abundance of corporate greed means the hands off, low regulation government era, is over as our government will mandate more control. Free market capitalism has taken it on the chin, soon to be replaced with a more socialistic form of government.

Short Term Optimism and Long Term Skepticism
Warren Buffett is predicting an uncertain period of time with a slow but eventual recovery. He is quoted as stating that in five years things will be better than they are today. I would agree that we will see recovery over several years. The markets have experienced such a beating that even an extended recession is already accounted for in the value of stocks. However, I also believe we will continue to see choppy activity as more negative news develops. Adventuresome, but patient, investors will be able to find short term trading bargains along the way.

In the long term, we are in a pickle. We have created serious damage this time as our government is dealing with the financial crisis by freely printing money. If we go too far, the medicine may be worse than the disease. We can not print money without limits and not expect our economy to suffer. Monetizing our money supply by printing more money is the same as asking all of us to turn in our “green backs” and issuing new blue money worth a fraction of the value. This brass move has actually been used in some countries and the results are disastrous. By cranking up the printing presses instead, our government can control the winners and losers by allocating the money to pet causes. After watching the live, vicious debating over the bailout bills, I am not confident that our legislators know what they are doing. If I have not been bold enough yet, I would suggest that our policy makers are wildly swinging the piñata stick in the dark when the solution isn’t even in the room.

The American economy has been riding a sustained wave of prosperity for decades. Our standard of living has far exceeded the rest of the world and over the next decade this will end. I am not suggesting that we will become a third world country, but our days as the lone economic super power are short-lived. Asian economies will soon continue on a strong growth wave and America will be saddled with high inflation, high taxes, and a regulatory style of government.

Where Should Your Focus Be?
America’s long term issues don’t mean you can’t enjoy contentment and prosperity, but it does mean Americans need to follow a new game plan. For the past 30 years, I have built my financial behaviors based on the teaching of Larry Burkett (deceased 2003). I have created the following broad guidelines to guide my behavior:

1. Eliminate Debt.

2. Save 10 to 20% of your income.

3. Live on less than you earn.

4. Diversify so any one company or investment area can’t derail your plans.

5. Invest to preserve your capital during difficult times. 6.Invest to stay ahead of inflation.

7. Stay humble and trust in God’s provisions.

8. Give 10% of my income to my local Church.

9. Continue to invest in your own job skills that others will need.

10. Work hard.

Burkett’s book in 1990 titled “The Coming Economic Earthquake” fully predicted our financial problems today. What he could not predict perfectly was the exact timing of when the crisis would begin and the exact ramifications. Burkett advised in his book to invest into widely diversified stock investments that are capable of outpacing inflation and investing in international stocks and investments not denominated in the U.S. dollar. He advised against buying gold because the world would be operating on electronic credits and gold would only provide a false sense of security. A client and friend of mine recently commented that you only need enough gold to bribe the boarder guards.

Is everything Burkett projected going to come true? Absolutely not, but if you follow his common sense advice over the years, you will survive even the worst of situations if they occur.

Today’s Indicators:

Factor	Influences	Current Outlook
Inflation	Interest Rates & Profits	Bullish
Fiscal Policy	Interest Rates	Bullish
Monetary Policy	Interest Rates	Bullish
Economic Growth	Profits	Bearish
Earnings Growth	Profits	Bearish
Stock Valuations	(based on prices/earnings)	Bullish
Exogenous (oil, Iran, etc.)	Interest Rates	Bearish - World Wide Recession

As you can see, the indicators for the market are either very negative or positive. Nothing is in between. With this bar-bell reading it will be difficult for anyone to make accurate predictions.

It is always foolish to predict market bottoms and earnings in the future, but many people have inquired about what I think. I feel that we have seen the market bottom when the DOW index hit 7500. I have been buying every time the DOW dips below 8500. It certainly is possible that we will test the lows again if another shoe drops that we are not anticipating, but I would use it as a buying opportunity. I am more concerned with the inevitable double digit inflation than deflation and depression.

Buy-and-Hold vs. Market Timing.
My advice going forward will focus on time tested, broadly diversified solutions for my core recommendations.

Investors are wondering if a new play book is needed. Is a buy-and-hold strategy a dead-end game plan in today’s environment? I don’t believe so. I would rather place my faith in an approach that has been successful for generations than one that we invent on the spur of the moment with an unstable world.

I realize it can be frustrating to hold tight when it seems that we are needlessly holding on in a losing market. Timing the market correctly is very difficult and you have to make two perfect timing calls to come out ahead. You have to know when to sell around the top and you have to accurately predict the bottom. In hind sight this seems easy but most people sell around 10% lower than the top, and then jump in way before the true bottom is created, thus losing another 10% to 20%. Worse yet, they don’t move back into the market at all and watch all the recovery happen while they are sitting in cash. In the long term, sitting in cash making a low rate of return is a disastrous solution. It feels safe, but will typically leave you short of your goals.

In response to the current volatility in today’s market, I will be offering interested aggressive clients an option where a small portion of their portfolio is actively traded. See a separate letter included with this newsletter called “An Active Approach”.

Closing
Last year was an unprecedented year. The world is rapidly changing, but, and I pledge to my clients that I will stand by my core values of “Trust, Communication and Results”.

The first value reflects on my personal value system. I continually pray that I will never violate the rule that a Man’s good name is more valuable than riches. In addition, I pray for my clients individually that I might be a wise and faithful steward and help them achieve their goals.

The second value is an activity. Rather than purchase a canned newsletter, I put a lot of effort in writing these less than eloquent, but colloquial personal letters. As a local adviser I am readily available to you for advice as needed.

The third value of results is only achieved by hard work. I obviously don’t have a crystal ball but I spend a lot of time researching and reading. I believe that long term investment success is won by, in baseball terms, hitting a lot of singles and bunting rather than swinging for the fences.

May we all focus on a life of contentment and enjoy a peaceful new year.

Sincerely, Ron Dickinson, CPA, CFP®, MPA-tax

“Never trade who you are for what you want”