Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : APRIL 2009

Looking Back: Q1 2009

We held our first Client Education Event on February 4, 2009 at Round Hill Country Club. Attendance was excellent with over 70 people attending, including friends of clients. Several of them have subsequently retained our services. We are very grateful to our clients for referring their friends and colleagues as this is, and always has been, our primary source of new client relationships. We welcome future referrals from you as we grow towards our goal of being one of the preeminent financial advisory firms in the East Bay and beyond. We are planning our next Client Education Event for Wednesday, June 3 at Round Hill. You will receive our invitation in May with specifics.

As for the financial markets, Q1 was another roller coaster as volatility continued to be unusually high. After falling nearly 24% from the end of December to March 9, the stock market staged a strong rally to finish the month up 17% from the low, as measured by the S & P 500 Index. However, the full quarter result was still -11.01%. Coming on the heels of Q4 2008 when the index was down 21.9%, this was a six month return of nearly -30%, one of the worst such periods in history. Since Q3, 2007, the last positive quarter, the index is down nearly 46% over the past six quarters. At the low on March 9, the index stood at 677 down from 1,565 on October 7, 2007, a drop of 56.7% (excluding reinvested dividends). Investors were wondering how much lower can it go? The answer is always the same: no one knows, and yes, it could go lower. While we claim no ability to call a top or bottom in advance, we can say we are likely much closer to a bottom than a top. Still, we remain cautious in spite of the impressive rally of the past few weeks. We believe the recession has at least six months to run its course, and likely a year, possibly longer. As many of you have heard me say, the problems with financial institutions and real estate related companies were many years in the making and permeate almost every aspect of the global economy and will not be easily nor quickly remedied. We are in the process of global deleveraging, paying down the excessive debts incurred over the past decade and longer, and this will take time and be painful. Job losses hit record levels during Q1, economic activity contracted significantly and governmental attempts to stimulate had yet to see much in the way of results.

Other financial markets also struggled. Foreign stocks in developed markets were down even more than U.S., down nearly 13%, though Emerging Markets (Asia ex-Japan, Latin America, Eastern Europe) were actually slightly positive. Bonds were basically flat, as were Commodities, with the exception of Gold, which was up 61%. Other alternative investments varied considerably, from REITs, (Real Estate Investment Trusts) declining 59.9%, while our principal Absolute Return fund, Hussman Strategic Growth Fund, gained 7.5%. Portfolios benefited from broad diversification more during the recent quarter than during the previous six months, a welcome return to more typical historical relationships.

Looking Forward: Q2 2009 and Beyond

Our perspective has changed little since our last Client Letter in January. We expect the recession/contraction to continue for several more quarters, at least until Q1 2010, and possibly until the middle of next year. While we acknowledge and hope that stock markets will anticipate recovery by several months, we do not see enough light on the horizon to alter present allocations. We remain tactically defensive despite the recent rally in share prices. If in fact this is the beginning of a cyclical bull market in stocks, we welcome it and our present exposure will allow us to participate, though less than fully. If the market takes another abrupt turn down, we are positioned to avoid the worst of it, though we would not be completely immune. We believe this balance between caution and opportunity is appropriate for our clients at this time, with the degree of exposure dependent upon your specific situation and risk tolerance. We thank you again for your ongoing trust and patronage.

James P. King, CFP®
April 9, 2009