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Market Commentary

12/14/2008 --- Further Improvement In The Credit Markets

This week the interest rate for bank-to-bank loans (LIBOR) fell to its lowest level in over three years, closing at 1.92%. This indicates that banks are more willing to make loans, a crucial step to improving the economy. The spread between LIBOR and 3-month treasuries (the TED spread) also improved this week, closing at 1.91%.

For the first time in 50 years, total household debt fell. Furthermore, consumer savings rates have increased and market volatility has eased somewhat. A higher savings rate won't help the retail sector in the short term, but is a positive sign that the American consumer finally seems to understand the importance of living within one's means.

On Monday the Federal Reserve opens a two-day meeting to determine its next move for the federal funds rate. The majority of economists are predicting a 0.5% rate cut.

12/10/2008 --- Signs Of A Market Bottom?

At market highs, extreme optimism reigns supreme as the general investor consensus is that things can only get better and the prevailing "fear" is one of missing out on the anticipated additional gains that seem to be just around the corner.

At market bottoms extreme pessimism takes hold of investors as the consensus switches to that of "as bad as things are, they will only get worse." Signs of extreme pessimism have been appearing more often lately, especially comparisons to the Great Depression. Before falling prey to the media's constant barrage of gloom and doom, take a step back and make realistic comparisons. For example, gross domestic production (GDP) in the 4th quarter of 2008 is expected to fall by 1.5%. During the Great Depression, GDP fell by 30%. We are nowhere close to that number now.

Unemployment comparisons have also been blown out of proportion. The reality is that as bad as unemployment is now, the number of job losses would have to double to even approach the unemployment rate of the 1981-82 recession.

But not everyone is predicting the apocalypse. Wells Fargo CEO John Stumpf said he sees signs that real estate prices may be bottoming. Considering that the stock market almost always starts recovering before the economy bottoms out, a stabilization of real estate prices would greatly boost investor confidence.

To successfully time the market, an investor must go against the prevailing opinion by selling when everyone else is buying and vice versa. That is why we are not proponents of market timing; very few if anyone can consistently and accurately call market tops and bottoms while simultaneously having the courage to go against the prevailing investor mood. However, while we are not calling a market bottom, long-term investors can take heart that the odds are increasing that we are close to a market bottom. Moving out of stocks now could permanently damage long-term returns of one's investment portfolio.

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