As you may already know, over the weekend Standard and Poor’s lowered the US credit rating from AAA to AA+ with a negative watch. This unprecedented event along with recent economic news has several important implications.

First of all, you may have noticed that last week we significantly reduced your stock exposure through sales and the execution of stop loss orders. It is our opinion that the current environment will continue to be volatile and unpredictable and carry a higher degree of risk than

normal. Global stock markets will need to continue to adjust to the fundamental changes occurring in the overall slower – if not stalled – economies. Stock and credit markets may also experience periods of less than normal liquidity over the next few weeks. To say the least, we are in uncharted territory and we have responded by reducing your risk exposure.

No one yet knows with any certainty when markets will find better footing and this is not the time when you should need to feel forced to make transactions unless there is a changed view of the fundamentals (for the better) or a major injection of emergency liquidity. The key over the next few weeks is to be prepared to act on exceptional opportunities when they present themselves. Over the weekend, we have been making lists of investments given multiple potential economic and market scenarios. Of course, at this time, it is next to impossible to judge with accuracy which scenario is likely to unfold. Regardless, we are prepared to take action when necessary.

At some point, financial markets will price in all potential negative news, settle down, and trade more normally. It is from these levels that the best risk adjusted entry points can be made and stock prices will once again trade based on corporate profit growth. In the meantime, expect markets to trade in a wide range both up and down. During this time we will use market strength to possibly further reduce any unwanted investment exposure and use market weakness to carefully invest in unique opportunities.

Keep in mind that if you have low cost basis stock or have asked us not to use stop loss orders, your reduction in stock exposure may be more limited.
The silver lining of America's credit downgrade is the likelihood that we will now find a long term solution to our credit problems that will get us back to prosperity and our position as world leader.

Over the next days, weeks and months we will be keeping a close eye on markets, economies and politics. During this time all of us will do our utmost to provide you with the same quality, risk adjusted, investment management that we have been known for over the past two decades.

We hope this update finds you well – please let us know if you have any questions or thoughts.

Sincerely,

James E. Demmert
Managing Partner