AULD LANG SYNE 2008

By Gus Krafve

January 8th, 2009

Borrowing the words of the Scottish poet, Robert Burns, let us hope that the market we experienced last year is ‘old long past’. The S&P 500, an index of the largest 500 US based stocks, lost 37% in 2008. To put this in perspective, we looked at the returns of the largest US companies since 1872. Using performance calculations provided by Ned Davis Research, we found that there have only been two years that were worse for the stock market--1931 and 1937--in which the S&P 500 declined -47.1% and -38.6% respectively. There were only two other years where the S&P 500 declined more than 30%; these years were 1907, down -33.2% and 1917, down -30.6%. In three of the four cases where there have been declines of over 30%, the market rallied significantly the year following. In 1908, 1918 and 1938, the S&P 500 rallied 37.4%, 16.2% and 25.2% respectively. The one exception was 1932; the S&P 500 was down -15.1% after being down -47.1% in 1931.

What set 2008 apart from other bear market years in history is that there was virtually no place to hide. Nearly every asset class experienced one of its worst years in history. Commodities, which had been beloved by hedge funds, endowment funds and some of the most sophisticated investors, witnessed price declines of 42.8% as measured by the S&P/Goldman Sachs Commodities Index. The price of oil peaked in July at $147 per barrel and ended 2008 at $41 per barrel, a decline of 72%. The most recent S&P/Case-Shiller composite of home prices in 20 major metropolitan areas declined -18% in the most recent twelve-month period.

As fear gripped the markets, there were a few asset classes that did rise in value as investors clamored for safety. With yields already at multi-decade lows, government treasury bonds rose in value sending yields below 3% for 30-year maturities and near 2% for 10-year maturities. Gold also managed to gain nearly 5% on the year. Finally, the US dollar rose 5.85%. The rising dollar may be somewhat surprising given that it seemed everyone had called for its demise over the past couple of years. We believe that a rising dollar, during a time of global unrest, cements the fact that the United States is still viewed by investors globally as the economic global power and a relative safe haven.

What will 2009 bring? The coming year offers very little in the way of certainties. Many companies aren’t giving quarterly or yearly financial guidance due to the very uncertain economic environment, and the crystal ball of economists is cloudy at best. We are confident the news flow will still be negative for at least the first half of 2009. That being said, the stock market has already priced in a very poor economy. As we wrote last month, we are seeing signs that the credit crisis is easing. We are seeing further signs that are confirming an improvement in credit conditions, the latest confirmation being an improvement in the corporate bond market. A stabilizing credit environment is one of the major catalysts needed to improve the economy, stock market, bond market and the real estate markets.

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FEES NOW CALCULATED ON DAILY VALUATION

Previously, fees were calculated based on a one day “snapshot” of the market value as of the end of the month. Due to an enhancement of our trust accounting system, we are now able to calculate the average daily market value of an account. This method will more accurately account for increases/decreases in market value over the fee period resulting from cash disbursements, cash deposits, security movement, and stock market fluctuation. The fee schedule on your account is not changing, only the method of calculating the account market value for fee purposes.