Educational and Worth Some Time   
The Possibilities of Now   
MARKET MINUTE: CASHING OUT IN THE TROUGH   
IF MR. MARKET WAS CALLED IN TO SEE THE BOSS   
 
Benjamin Graham, the noted economist and the father of value investing, long ago created an allegorical tale about Mr. Market (see Wikipedia), to personify and thereby explain the often irrational behaviors of financial markets.  With a nod to Graham, let's once again hear from Mr. Market.

MEMO
 
January 28, 2009

To:         The World
From:     Mr. Market
Re:         Performance Review


This is in response to my recent performance review. I feel that your assessment of my efforts in 2008 was overly harsh. If you recall my original job description, I was hired to discount the future value of corporate earnings and to generally provide advanced warning of changes coming in the real economy. And I think I did a very good job of that. I was quite clear this past fall. I said it looks the real economy is going to get worse. And it has. And I am dutifully scanning the horizon looking for signs of change. I just don't see any yet. When I do, I will let you know. And as for the comment that I have completely failed to provide any actionable advance warning about changes in my price, that was never in my job description. We discussed this when you hired me. I am prone to sudden and huge price fluctuations. That's just how I am. So, no, I will not be able to send a memo to you in advance of a recovery in stock prices. If you can't see that I am the best long-term vehicle for wealth creation, well, I won't be able to help you achieve your long-term objectives. That's just how it is. I am sorry if I am being a bit a bear right now. Just, please, give me some credit. I feel that my long-term track record speaks for itself.


Mr. Market may be a bit mouthy, but makes a rather good point. The market and the real economy are two entirely different beasts. The market is constantly trying to measure where the real economy will be in the future. The carnage we saw on Wall Street this past fall is playing out on Main Street right now. On Monday alone, corporations announced more than 75,000 new layoffs. And the market, it was UP a bit. It was saying, "That news is so now. I told you about this months ago. I was expecting this. Frankly, I've moved on. I'm looking into the future." You see employment statistics, which are dominating the news and probably will likely continue to dominate the news for the foreseeable future, are what is called a trailing indicator. Monday's announced layoffs will take some time to become implemented layoffs and even more time will go by before they are incorporated into official government statistics. The "employment story" will dominate the media's story line for quite some time to come. But the market won't be paying attention to the employment story so long as it is in line with the market's expectations. And I would say with the market hovering around 40% below its peak, the market has priced in (discounted, forecast, etc.) quite a substantial employment story already.

When the market does recover, the reasons for gains on Wall Street will be nowhere in evidence on Main Street. The market's premonition of rising corporate earnings may not, at first, be in any way related to an improving economy so much as a result of cost cutting (i.e. layoffs). That is absolutely the textbook unfolding of an economic cycle. Markets improve, earnings improve, economic output as measured by Gross Domestic Product improves and last of all employment improves. When a recovery is, eventually, evident on Main Street and in the employment statistics it will be old, old news to the market.

Not only is the market annoying, not only is it completely unpredictable, it is also critical to achieving your long term objectives. All of our clients have an allocation to stocks. Depending on your age and circumstances that could be 20%, that could be 100%. We have as a basic belief that over the long term stocks will outperform bonds which will outperform cash. You have to be patient for that to occur. But, again, with the market hovering around 40% below its peak, and with that water long ago under the bridge, we remain confident that the patience required for stocks to outperform the alternatives will be a reasonable amount of patience. And when we say reasonable, we don't mean a lifetime but want to remind you that your financial plan does span a lifetime. And so we remain committed to the market and believe that it is the best available vehicle for long-term wealth creation and the achievement of your long term goals.
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