As Economic Indicators Show Signs of Recession.

Global stocks have been extraordinarily volatile and have spent much of the past 6 months in negative territory. We believe that this behavior is directly linked to the structural weakness and unemployment status of the US economy, as well as the continued financial crisis which is spreading throughout Europe. Though China, India and Brazil are still engines of economic growth, even these regions are being negatively affected by the circumstances

in the more developed world. So what in the world (literally!) should we do as investors in this environment?

First and foremost, we believe that in periods of economic weakness and financial crisis, your portfolio should be reconfigured to become less volatile. The main reason for this philosophy is that our firm usually manages the “bulk” of a client’s liquid net worth - these assets are irreplaceable and cannot withstand catastrophic loss. In addition, our desire for longer term performance relies on maintaining principal in bad markets so that we have more capital to reinvest for you when the storm passes. This storm, we believe, has yet to pass. Therefore, you may recall the many changes we instituted mid-summer which included selling companies that were reliant on strong economic growth and replacing them with high dividend paying, “recession proof” companies. In addition, we have maintained higher than normal cash and bond balances, and maintain short positions, all of which has made your portfolio, as a whole, significantly less volatile than the overall market, while still providing dividend return. Keep this cozy thought in mind next time you see markets precipitously fall in a matter of days (as occurred last week).

Many investors wonder how long it will take for the world’s problems to become resolved. Though we wonder the very same thoughts, we are also focused on the point at which financial markets will have discounted all of this trouble. We do not believe that at current levels stock prices fully reflect the seriousness of the current issues (or the potential for them to get worse) and would not be surprised to see stocks eventually trade lower than today’s levels, hence, our more conservative approach to your portfolio. Our research suggests that much of the trouble in Europe and here in the US may be known, quantified, and that solutions may be found by the end of the first quarter of 2012, at which point there will be an excellent opportunity to purchase great global companies at historically low prices. Until then, markets will likely continue to be unstable. Keep in mind that your portfolio is geared to be significantly less volatile while providing dividend yield.

In recent years, we have experienced positive returns. Though this year has been challenging for both markets and investors, we believe that 2012 will eventually provide a better environment in which we can once again be more growth oriented and deliver returns similar to what we have become accustomed to.

We hope you and your family had a safe Thanksgiving and that you enjoy the holiday season! If you have any questions or would like to get together for a portfolio review, please let us know.

Sincerely,

James E. Demmert
Managing Partner