3^rd Quarter 2009 – 2^nd Quarter 2009 – 1^st Quarter 2009 - 4^th Quarter 2008 –

QUARTERLY INVESTMENT REVIEW
JULY 2009

Fair Breezes and Ill Winds

Investors have their noses to the ground, trying to pick any scent that would indicate market direction.  Unfortunately the highly variable winds of economic data have provided a more faint and irregular trail than what investors would desire.  Ill economic winds carry ongoing problems in the housing sector, increasing unemployment, and bankruptcy filings by several large corporations (notably General Motors and Chrysler).  Once considered a source of “we-can-do-anything” American pride, the Hummer brand is now owned by the Chinese. Also, the Commerce Department made their final revision to their calculation of “growth” of overall economic activity in the first quarter, to an overall decline of  

-5.5%, slightly better than previously reported but still quite dismal.

On the other hand, fairer breezes of data bring more pleasant aromas:  interest rates are being maintained at historically low levels that should stimulate the economy.  Consumer sentiment--a very important economic indicator--has rebounded.  The consensus economic expectation is for the second quarter to also be negative, but at a rate that signifies a flattening of the decline.  Pundits also expect that this fall we will see the beginnings of modest but positive economic growth.  The resulting confusion these crosswinds present to investors is plainly evident by the zigzag behavior of the markets.  Most stock indices lost over 10% in the first quarter, only to gain back those losses in the second quarter.  Conflicting reports make predicting the direction of markets difficult.

Let’s take a look at the results for various indices for the quarter and how the end-of-quarter levels compare to the earlier market top in 2000.  All index values come from the Wall Street Journal.  Please note that performance of stock indices do not include dividends.

	June 30		Since Market Peak
	2nd Qtr	Yr-to-date	(3/31/2000)
Dow Jones Industrials (the Dow)	+ 11.0%	- 3.8%	- 22.7%
S&P 500 Stock Index (the S&P 500)	+ 15.2%	+ 1.8%	- 38.7%
NASDAQ Composite	+ 20.0%	+ 16.4%	- 29.9%
Russell 2000 Index (small companies)	+ 20.2%	+ 1.7%	- 5.7%
Dow Jones World (non-US)	+ 26.0%	+ 11.3%	- 14.3%
10-Year Treasury Bonds	- 5.9%	- 8.6%	n/a
Commodities: AIG Index	+ 11.6%	+ 4.5%	n/a
The U.S. Dollar (JPM Index)	- 5.5 %	- 1.4%	n/a

As you can see, all stock indices posted extraordinary advances this past quarter.  While this advance offset similar losses experienced in the first quarter, the notable exception is the tech-dominated NASDAQ Composite index which had a lesser loss than other equity indices in the first quarter.  Global markets also snapped back from first quarter losses.  Bonds had a rough quarter as investors sold bonds to participate in the stock market.  By the end of the quarter, the index of 10-year treasuries lagged all other indices presented above. 

Notable in the chart above are the numbers in the last column on the right.  All stock indices are lower than they were over 9 years ago.  The media is referring to this as the “lost decade”.  What we have to be careful about is to navigate while looking forward, not with our vision firmly fixed on the rear view mirror.

Where We Are Now

Reflecting a swing of the pendulum back to the “cautionary” side, markets have eased a bit since the end of the quarter.  Reports of increasing job losses have presented a two-edged sword to investors:  on the bright side, the likelihood of inflation rearing its ugly head is significantly reduced even though capital markets are swimming in dollars from federal programs; however, with fewer people working it does not bode well for consumer spending, the housing market, nor for corporate earnings--all lynchpins for economic recovery and thereby recovery in stocks.  Neither will it help the borrowing public pay down their still-substantial household financial debt.  Taken as a percentage of income, household debt is still near historically high levels as the capacity of many households to pay off debt remains limited.  As previously mentioned, The Federal Reserve has continued to keep interest rates at historically low levels, trying to make borrowing costs as low as possible.

Effects of the government’s attempts at financial stimulus have been less successful than initially hoped as banks hesitate to become partners with the federal government.  The stigma and strings that go with the arrangement are distasteful to many.

Our expectations for international economies presenting increased growth potential is coming to pass as we anticipated--as well as the weakening of the dollar in the face of lower interest rates here than abroad.  Latin America, China, and India have experienced especially robust rebounds in their stock markets.

Looking Ahead

While there are some reasons for concluding that the foundations of stability are in place, there is still no reliable, consistent confirmation that a meaningful recovery has started.  Absent economic information (like corporate earnings surprises) to provide a solid reason for a market trend to be established, stocks will likely continue to trade in a range defined by a low of approximately 8100 points on the Dow to a high of around 8900 points.    

We still do not expect a rapid recovery.  Stocks will likely continue to trade in the range noted above.  Should economic data begin to reinforce the idea that a modest recovery has begun, stocks will advance to reflect this expectation.  As with many market advances, often the initial advance is overdone as investors react to positive news and the market finds its new equilibrium.  We continue to see opportunity in the market when it is trading at the lower end of its recent trading range.  Interest rates will remain low to help stimulate the economy.

As always, we will continue to follow the markets closely and will take appropriate actions within client accounts to manage risk and return in accordance with each respective Investment Policy Statement.

Please feel free to call with any questions or comments.

________________________________      ____________________________________

Craig S. Limoges CFA, CFP, EA                       George S. Middleton CFA, CPA-PFS

QUARTERLY INVESTMENT REVIEW
APRIL 2009

The Economy Is A Turtle On Its Back

A turtle on its back is a pitiful sight. Without some sort of external intervention the poor thing’s feet can thrash helplessly in the air for the longest time with no way to independently right itself back to normal.  Like the biggest Galapagos turtle you can ever imagine, the economy has been turned on its back, feet flailing away to no avail.  This juggernaut turtle has plenty of strength but no leverage or traction with which to use that strength.  Now enter the government as this giant turtle’s benefactor, intervening to take extreme steps to rock the giant turtle- economy enough to allow it to dig its claws in so that it may begin to right itself.  Stay tuned, viewers!  In the next episode of our story we will see whether the extent of the government’s efforts have been enough to get the turtle back to its feet or not.  In fact, it may take several episodes to know for sure. 

When it was announced that the last quarter of 2008 experienced the worst decline in 26 years, continued pessimism put selling pressure on the markets.   International indices were also drawn into the sell-off, as economies and financial markets around the world faltered.  After the S&P 500 reached its lowest level since 1996, a noteworthy surge brought averages up by nearly 25% (from that low).

Following are the results for various indices for the quarter and how the end-of-quarter levels compare to an earlier market top nine years ago--in 2000.  All index values come from the Wall Street Journal.  The return of the S&P 500 does not include dividends.

		Since Prior Peak
	1st Qtr/Year-to-Date	(3/31/2000)
Dow Jones Industrials (the Dow)	- 13.3%	- 30.3%
S&P 500 Stock Index (the S&P 500)	- 11.7%	- 46.8%
NASDAQ Composite	- 3.1%	- 66.6%
Russell 2000 Index (small companies)	- 15.4%	- 21.6%
Dow Jones World (non-US)	- 11.7%	- 32.0%
10 Year Treasury Bonds (Ryan Labs)	- 2.9%	n/a
Commodities: AIG Index	- 6.4%	n/a
The U.S. Dollar (MS Index)	+ 4.4%	n/a

Clearly, stock indices across the board suffered from the selling.  Interest in tech stocks helped the NASDAQ index hold its value better than other stock indices.  Bonds declined due in part to concern that the huge level of new government debt would result in too little money chasing too much debt (low bond prices and therefore more upward pressure on interest rates).  Commodity prices eased this past quarter as demand for resources declined.  The U.S. dollar gained from international recognition of its “safe harbor” status--even with all the structural financial problems and uncertainty here in America.

Where We Are Now

Recent economic turmoil continues to wreak havoc both here and abroad.  National unemployment has reached 8.5% and is expected to increase, perhaps to 10% sometime later in the year.  According to an April 3rd article in the Wall Street Journal by Sudeep Reddy, the number of people receiving jobless benefits has climbed to a record high.  Other record highs:  percent of both consumer loans and home equity loans that are delinquent.  In America, nearly all State budgets are firmly in the red, with serious cutbacks in personnel or pay announced and more anticipated.  State revenue and cost structures are being re-evaluated to try to close budget gaps.    

Builders and homes sales are suffering.  The half full glass is that the number of home sales is increasing.  The half empty glass is that home prices have continued to drop precipitously as builders and other sellers accept lower prices to rid themselves of the baggage of leveraged homes and banks sell foreclosed properties for whatever they can get. 

Recently the Federal Reserve has taken drastic measures to try to turn the economy around.  In addition to lowering short-term interest rates to basically zero and flooding the financial system with cash through the purchase of $300 billion in long-term government debt (and thereby lowering their own cost of borrowing); it has recently created a public/private program to purchase up to $1trillion of “toxic assets”.  The latter would basically apply some principles of Spring Cleaning to clean up bank balance sheets to help facilitate future lending.  This plan was well received, resulting in an advance of the Dow of almost 500 points (nearly 7%) in a single day.

Looking Ahead

How could the markets increase in the face of such negative news?  Several factors:  (1) the markets are looking forward 6-9 months into the future.  The upsurge in stock prices reflects the hope that the Fed’s aggressive measures will allow the economy to stabilize and improve; (2) several minor economic reports encouraged that sense of hope; and (3) investors don’t want to be left on the shore when the Recovery Boat pulls away.  It didn’t hurt that Wells Fargo released an unexpectedly positive earnings report, giving investors the hope that financial stocks were stabilizing—which could be taken as a sign that the beginnings of better days had begun.

Significant unresolved economic issues cause us to remain conservative, especially in the short term. The consumer is still clinging tightly to the coin purse and retailers and suppliers are hurting.  The work-out of the automakers’ problems will likely come to a dramatic head in the near future.  However Detroit’s problems are resolved, it won’t be easy and may roil the markets.  For longer-term investors---those who have 10 or more years before retirement--we expect financial assets to recover from the declines suffered, and one should prudently look for the opportunity to participate in that recovery. Caution is paramount.

As always, we will continue to follow the markets closely and will take appropriate actions within client accounts to manage risk and return in accordance with each respective Investment Policy Statement.

Please feel free to call with any questions or comments.

________________________________      ____________________________________

Craig S. Limoges CFA, CFP, EA                       George S. Middleton CFA, CPA-PFS

 

QUARTERLY INVESTMENT REVIEW
JANUARY 2009

A Year For The Record Books

Welcome to 2009!  We at Limoges Investment Management would like to once again thank you for your business over the past year.  While our duties have been challenging, more people are recognizing the value we bring to the prudent management of client investments and we are thankful for your trust.  We look forward to serving your personal financial needs by offering sound advice and by continuing to manage your financial resources in a responsible manner. 

2008?  Youch.  That hurt…..  Let’s indulge ourselves in a short pity-party before looking ahead.  How bad was this past year?  As is painfully obvious to all but the deepest-burrowing ostriches, the past year ranks among the worst since before World War II.

Following are performance results for various indices for the quarter and for the year as well as how the end-of-year levels compare to an earlier market top in 2000.  All index values come from the Wall Street Journal.  Stock index returns do not include dividends.

	For Year		Since Market Peak
	4th Qtr	2008	(3/31/2000)
Dow Jones Industrials (the Dow)	- 19.1%	- 33.8%	- 19.6%
S&P 500 Stock Index (the S&P 500)	- 22.5%	- 38.5%	- 39.7%
NASDAQ Composite	- 24.3%	- 40.5%	- 65.5%
Russell 2000 Index (small companies)	- 26.5%	- 34.8%	- 7.3%
Dow Jones World (non-US)	- 22.0%	- 46.0%	- 23.0%
10-Year Treasury Bonds	+ 15.7%	+ 21.2%	n/a
Commodities: AIG Index	- 30.1%	- 36.6%	n/a
The U.S. Dollar (JPM Index)	+ 5.1 %	+ 7.7%	n/a

For stock investors, there was no hiding from the torrent of selling, with all equity indices taking a severe beating.  According to Ryan Labs of New York, the S&P 500’s loss of 38.5% was its worst loss since 1937.  October and November were especially brutal, as equity investors rushed the exits, spooked by the prospects of a shaky financial system and declining economy.  Only two investment alternatives provided positive returns for the quarter and for the year:  treasury bonds and, surprisingly, the U.S. dollar.  Ten-year treasury bonds notched a huge gain of 21.2% not only in response to lower interest rates but also demand from buyers looking for a safe haven in the storm.

It was surprising to many that the U.S. dollar turned in a positive year--due mostly to the final quarter when global anxiety peaked.  Many thought the turn of events in America meant that the issuance of U.S. government debt issued to fund bailouts and deficits as well as the loss of confidence in the American security markets would lead international investors to take their ball (or their yen, yuan, etc) and go home.  Instead, the dollar gained strength like it historically has in times of international crises. 

For all their previous out-performance, international stocks as measured by the Dow Jones World (non-US) index lost a whopping 46% for the year. Commodities (including oil) fell like a gold nugget down a mine shaft due to reduced demand. 

In spite of the overall disastrous performance of stocks in the past quarter, it is interesting to note that during the same period we experienced the 5th and 6thgreatest percentage one-day advances in the Dow of all time--including single-day gains of +936 points and +889 points (the largest movements since 1933).  We also had the largest 2-day loss in both the Dow and the Russell 2000.   Unfortunately, volatility will likely be with us for a while.

Where We Are Now

The National Bureau Of Economic Research (NBER) recently announced that the U.S. economy has been in recession for 13 months.  Over the past year the economy has lost 2.5 million jobs, the worst job loss since 1945.  The rate of economic contraction in the past quarter is estimated to be the sharpest in 25 years.  Consumer prices actually declined in December due to reduced demand by consumers, leaving the rate virtually unchanged for the year.  According to the Fed, last year consumers reduced personal debt for the first time since 1952 when they started keeping records for this.  Surviving banks are returning to the government’s “hog trough” to join in the feeding frenzy with auto manufacturers, mortgage lenders, equipment manufacturers, and a long line of hat-in-hand applicants.  The giveaway/rescue will be measured not in hundreds of millions or even hundreds of billions of dollars.  It is to be measured in trillions of dollars--trillions of dollars of increased debt which we and generations to follow will be trying to manage--and we have yet to act on preventing the Social Security system from falling under its own weight.  The Federal Reserve (“Fed”) is doing nearly everything it can to stimulate the economy and remove the loan default contagion from the system by buying troubled loans.  The Fed has reduced the federal funds rate to a historically low 0.25%, the lowest rate found in any reference.  At least for now low interest rates means the (current) cost of the treasury’s debt load is low. 

Looking Ahead

Earnings reports are about to be released for the fourth quarter.  Bleak results could easily push the markets down far enough to test the November lows.    Mediocre results might be accepted favorably due to low expectations.  Negative earnings will be countered by a surge of hope for improvement as the new President and his administration renew efforts to stem economic deterioration.   The incoming Obama administration will quickly pass another huge stimulus package that will add more to the debt load but also additional hope for economic recovery.  The remaining $350 billion of the rescue package is expected to be “released”.  The path out of this recession will be longer and more arduous than for a normal business cycle recovery. Market volatility will continue as hope battles worry. 

We are in “uncharted waters”.  With your personal finances it is a time that calls for austerity.  Continue to pay down debt as we look for signs of stability and recovery.  Investment assets should remain conservatively invested.  Continue to participate in retirement savings plans like 401(k)s.  Those with longer time horizons (greater than 10 years) should maintain a healthy allocation to stocks.  Those with shorter time horizons (retirement within 5-10 years) should be more conservative.  Try to keep the markets in perspective.  Just like the seeds of the current decline were sown in previous market advances (not to mention poor lending practices), the severe decline of the markets are sewing the seeds of a remarkable future advance. Like a sling shot having been pulled back, there is a great deal of stored energy to be released.  The further back the slingshot is pulled, the more strength it has when released.  The greatest advances in history were those experienced when the markets recovered from their historic losses of 1929-1931.  Recently we came across the phrase: “Opportunity looks bigger going than it does coming”.  It will be difficult to ferret out a real recovery from a false one. Our cautious nature means we have no desire to be the first to jump in, but we should realize that when the markets do recover it could be swift.  While we wait for valid signs of that extraordinary opportunity, we will continue to exercise prudence with client assets.

As always, please feel free to call with any questions or comments.

__________________________________       ____________________________________

Craig S. Limoges CFA, CFP, EA                            George S. Middleton CFA, CPA-PFS

 

QUARTERLY INVESTMENT REVIEW
OCTOBER 2008

We Are Living In Historic Days

Now you have something to tell your children and grandchildren when you get older (which seems to happen more quickly in bear markets than bull markets). You can tell them you witnessed the teetering of the country’s financial system and its distasteful but necessary rescue by a government bailout unseen since the banking crisis after the Crash of 1929 that led to the Great Depression.  When you  tell them about it, they may ask: “how did that happen”?  Here is some help:

• The partial repeal of the Glass-Steagall Act. Deregulation is a two-edged sword. The original legislation, enacted in 1933, created the FDIC and also prohibited commercial banks from engaging in many traditionally non-banking activities like brokerage, investment banking, and insurance. In 1999, competitive pressure led U.S. banks to lobby Congress and Federal Reserve Chairman Greenspan to support the repeal. Their pressure carried the day and the act was repealed, allowing banks to accept greater business risk. At that time it had been nearly 70 years since the government was forced to step in and take broad ownership in banks.
• Also in 1999, Congress was pressured to lower credit standards for loans in which U.S. government lending agencies (Fannie Mae, Freddie Mac) could participate. With this concession the government-agency-guaranteed sub-prime mortgage industry was born. Loan underwriters stepped up aggressive lending practices, including loans to unqualified borrowers whose ability to repay was questionable to say the least.
• The subsequent boom in real estate prices created a “buy now or never” mentality as home prices began to outpace affordability. With reduced lending standards, the mentality was to buy a home no matter how infeasible the payment plan (“you’ll be able to sell it at a profit next year anyway”). Again, creative new loans were devised to accommodate--and in many cases take advantage of--less credit-worthy borrowers.
• Financial houses and investment bankers created securities never before invented, packaging up other people’s garbage and wrapping it up nicely and selling it as diamonds all around the world. New financial products proliferated. That the underlying product was garbage was unimportant to those receiving bonuses for sales volume.

The depth of the risk was known to a small number of voices who were silenced or even rebuked, and the house of cards—as well as numerous banks and firms long regarded as the stalwarts of American finance—have come tumbling down. Governments around the world are scrambling to heal their economic patients before the sickness becomes worse. At this point it appears they will succeed (yes, ever the optimist) but it is unknown when markets will stabilize and at what level.

How extensive was the sell-off? Following are the results for various indices for the quarter and how the end-of-quarter levels compare to the market peak in 2000. All index values come from the Wall Street Journal. Please note that performance of stock indices do not include dividends.

	Sept 30		Since Market Peak
	3rd Qtr	Yr-to-date	(3/31/2000)
Dow Jones Industrials (the Dow)	- 4.4%	- 18.2%	- 0.7%
S&P 500 Stock Index (the S&P 500)	- 9.0%	- 20.7%	- 22.3%
NASDAQ Composite	- 9.2%	- 21.5%	- 54.5%
Russell 2000 Index (small companies)	- 1.5%	- 11.3%	+ 26.1%
Dow Jones World (non-US)	- 15.6%	- 30.8%	- 1.3%
10-Year Treasury Bonds	+ 2.3%	+ 4.7%	n/a
Commodities: AIG Index	- 28.0%	- 9.3%	n/a
The U.S. Dollar (JPM Index)	+ 6.0 %	+ 2.4%	n/a

10-year treasury bonds did very well this past quarter and are now the performance leader for the year, reflecting a move to a safe haven.  Yields of shorter-maturity treasuries have been driven very low due to higher prices.  It is interesting to note that small company stocks (Russell 2000) declined the least of the stocks presented above, consistent with their performance since the market high of 2000.  Other U.S. stock indices reflect an approximately equal level of malaise for the year.  Non-U.S. stocks definitely lost their luster and made up for some of their previous out-performance over the years.  Commodities prices--particularly oil prices--had a huge decline, reflecting a correction from previous sky-high levels as well.  The easing of oil prices also reflects the expectation that reduced economic activity will result in less demand for natural resources, including fuel.  The dollar clearly advanced this quarter as financial uncertainty spread to other countries and the dollar was seen as a safer alternative than other currencies.

Where We Are Now

Since the end of the quarter, stocks have been further eroded by repeated rounds of severe selling as well as at least one day of a huge snap-back advance.  For the one year period after the Dow’s all-time high--October 9, 2007--the index had declined by -35%.  We have recently experienced the greatest one-day point-loss of the Dow as well as a record one-day point-gain.  As far as the markets are concerned, you can describe the action as volatile and emotion-driven.

Looking Ahead

We have a three-legged problem at this point: the actual woes of the financial system, declining economic activity, and the trust and confidence of the public.  The broad measures of the rescue package are positive--a necessary evil if you will--but will take some time to take full effect.  As resilient as our economy is, weak employment, reduced business lending, and reduced consumer spending may lead us into a recession.  Such a slowdown would not be a normal business-cycle recession, but something rather different.  Full recovery will not be swift.  Unfortunately, the dramatic nature of the media has fanned the flames of fear.  The depth of our impending economic slowdown can’t be known but the unprecedented measures already taken to bolster the banking industry should soften the slide.  Markets will improve when capital flow is less restrained, consumers feel more confident about job stability, and the resolution of the housing/mortgage situation gets on track.

We are not in the game of trying to second-guess when we are at a bottom. It is more prudent to be watchful for signs of reliable market stability before fully positioning for recovery. 

Please feel free to call with any questions or comments.

________________________________      ____________________________________

Craig S. Limoges CFA, CFP, EA                       George S. Middleton CFA, CPA-PFS