Fourth Quarter, 2007

It's coming. Yes, within weeks you will be getting your much awaited 1099s and all those other friendly little tax-related scraps of paper. Over the last several years, especially since the passing of the (post-Enron) Sarbanes-Oxley Act, corporations must take extra care to report their finances accurately, or face harsh penalties including the risk of prison for their officers. This means that from time to time investors' brokerage firms receive corrected or even late tax reports from the securities held in their client accounts. Because of the distinct possibility that such reports will not arrive in January or even by February, I strongly advise you to tell your accountant NOT to FILE early. Bring in all of your tax information as soon as you can because your tax preparers can not file everyone on April 14^th or 15^th. They need the information as soon as possible, but to avoid having to file an amended tax return, which will cost you extra money, wait until at least the end of February before filing. It's still possible that one of your companies may report to you even later than Feb. 29^th. This is a leap year. Those of you who own investments that send K-1 forms need to wait until well into March if a partnership has been sending their K-1 forms late every year. You or your accountant will generally remember which ones are late. Also, it's a good idea to carefully keep your copies of the tax reports in the highly unlikely case that either you or your tax preparer loses one or more of your 1099s, W-2s, etc.

Past performance is no guarantee of future results. Where weak performance is concerned, this is good news. There has been weakness in the last quarter, particularly in the real estate and mortgage markets. Global and domestic stocks also performed anemically. A rapid growth in mortgage credit at low interest rates and a booming real estate market conspired to bring the housing market back down to pre-boom levels of pricing and activity as the bubble burst. What wasn't apparent to many of us, including me, was the possibility of an industry-wide credit freeze. It happened when a number of banks got scared and refused to lend during the late summer and throughout the fall. It was like an old fashioned “run-on-the-bank” a la “It's a Wonderful Life” with Jimmy Stewart. The only difference was that it was the banks that were panicking, not the average guy. They called in loans and credit agreements, thus freezing out companies which depended on available credit to operate. It may take a couple more years to unravel the knots in our global credit system. The main difficulty in bringing order to this economic situation is the complexity of how mortgage loans have been securitized. Loans were bundled together and sold in the market to investors as securities. So, instead of the XYZ National Bank of Anywhere, USA holding the mortgage and dealing with their borrowers, the bank, and many more mortgage companies wrapped up and bundled mortgages and sold them to firms on Wall Street which then sold these bundles to individual and institutional clients.

In my opinion, the large banks are not without fault. Federal and State Regulators are not blameless. I doubt that any regulators will be losing their jobs, unlike the thousands of employees of mortgage companies who have. Had the largest banks not put a stop to the flow of credit perhaps a correction would have ensued, instead of dozens of companies filing for bankruptcy.

Order is now returning to the real estate market. The Mortgage Bankers Association ® announced on Dec. 6, 2007 that the delinquency rate on mortgages on one to four-unit residential properties was 5.59% in the Third Quarter of 2007. The percentage of mortgages in foreclosure as of the end of the Third Quarter of '07 was 1.69% of all loans outstanding. Roughly speaking, most of us are not in foreclosure or delinquent. What is alarming the markets is that the rate of troubled loans has been increasing. If 92.72 percent of outstanding mortgages are performing and many people own their homes without debt, the good news outweighs the bad by more than 9 to 1. But the bad news has hit a lot of people very hard. Recovery will be gradual and inevitable.

Fear is in the air. The fear of Recession is at hand. An economic recession is a series of at least two back-to-back quarters of declining Gross Domestic Product (GDP). What is the difference between a recession and a depression? The wise crack answer often given by economists tired of answering this question is this: “A recession is where your neighbor just lost his job. A depression is where you just lost your job.” The real difference is in orders of magnitude. A recession is usually of short duration and mild. A depression is deep and of long duration. The National Bureau of Economic Research (NBER), founded in 1920, is the nation's leading non-profit economic research organization. According to their records there have been ten contractions (another word for recession) since 1945. The average length from the top to the bottom of the cycle has been ten months. Basically that means over the last 62 plus years the U.S. economy has slumped once every six years (on average), and has dropped for less than a year before returning on its upward long-term journey. The last recession was in 2001 after the Dot.com bubble, etc.

It's often been said that stock markets look ahead six to nine months. If there's trouble in the tea leaves, expect a lot of selling which causes prices to fall. If the crystal ball gazers see sunny days ahead, expect a lot of buying and upward prices. Over five or ten years the turbulence caused by these in and out buyers has been of minor consequence since 1950. Stocks, like water, seek their own level. This is another way of saying that stock prices are inevitably linked to the profits of the companies bearing their names. Don't you wish you had bought Microsoft when it first arrived as a new baby stock? Who knew?

Investors who have just joined the 90 million other Americans who own shares might be tempted to give up and throw away their shares because they are worth less than when first bought. I suggest you do just the opposite. Be contrarian. When others lose faith in their shares and sell them, go ahead and buy. Accommodate the market. Buy more shares. Ultimately, it's the number of shares in your basket that counts.

Long term charts show that the U.S. stock market has run in 14 to 16-year cycles of up and down since 1950. It is possible that the charts are predictive. If they are we could be half-way through a flat to only mildly upward stock market cycle. I'm referring only to the U.S. stock market. From 1950 through 2006 the average annual growth rate of the U.S. Real GDP has been 3.4%. The real rate is the rate adjusted for inflation (Consumer Price Index-C.P.I.). How about the rest of the world? During the past ten years the U.S. market has not been the number one performer, not even once (source: MSCI World Index). All those other faster growing countries are now leading the way. To be properly diversified I believe a portfolio should hold foreign as well as domestic stocks, bonds and funds. Call me to discuss your portfolio allocation.

I expect the next few weeks or months to be choppy for a number of reasons including everything on the nightly news, politicians promising the moon without mentioning the price tag, continued uncertainty and confusion about geopolitical instability, a declining dollar, increasing trade and budget deficits, threats to increase taxes on businesses large and small, housing issues and the tendency for markets to continue in the same direction until acted upon by an equal or greater opposite force.

It can all be summed by saying that I've seen this movie before. It always had a happy ending. It's called

UPS AND DOWNS

Scene one: A peaceful, orderly, prosperous town. Merchants are selling. Folks are buying. Nice.
Scene two: Villains ride into town and take over. Prosperity plummets. Townsfolk send for the LAW.
Scene three: In rides the Marshall and his posse. They clean out the bad guys. Some end up in jail.
Closing scene: A peaceful, orderly, prosperous town.

In our little allegorical movie the town is the market with you and me and the other millions of investors buying and selling. The villains are the disasters du jour. They could be inflation, deflation, any number of market upsets, and/or anything and everything one could imagine. The Lawman, our Marshall, is often the Federal Reserve and/or Congress and the President enacting legislation to help us townsfolk get rid of the trouble makers. After things quiet down the town grows and becomes a city. Now we're ready for the sequel:

UPS AND DOWNS - PART II

Same story. Different players. Bigger dollar amounts because it's a city.

UPS AND DOWNS FOREVER — THE ONGOING STORY…

Here's a statistic compiled by Ned Davis Research:

A hypothetical investor owning the S&P 500 Index on Dec 31, 2006 would have earned 8.4% per year by staying fully invested for the ten prior years. If this person jumped in and out of the market and missed only the 10 best days of that decade the return would have been only 3.4% per year. If the investor was out of the market missing the 20 best days, the return dropped again, this time to a minus 0.38 % per year. Continuing, if our friend missed only the best 30 days of the decade the return was minus 3.66%. Finally, if he or she missed the 40 best days of the market the return for the ten years would have been negative 6.41%. I don't know a better way to say stay invested. It's not about 'timing' the market. It's about 'time in the market'.

You might remember that we have a web site www.brimmerfinancial.com. I invite you to visit our site. Most of it is basic financial planning and investment material. My quarterly newsletters and essays are kept in the Archive. People who need help can source it out from home or their office. I mention this because our country is now entering a new epoch, the era of the retiring Baby Boomers. Some 78 million Americans born between 1946 and 1964 will be seeking income for retirement starting right now. According to the Financial Planning Association approximately 33% of American workers ages 45-55 have saved $25,000 or less for retirement. Now is the time to begin if you haven't or to increase your retirement savings/investments if you have. Every year everything you buy will cost more. This is what inflation means to you and me. The risk is not depression. It's inflation. The only known antidote to the increasing cost of living is an increasing income. Income is derived from active sources (salary) or passive sources (investments). Don't count on the Lottery.

Now allow me to bang the drum. Most of us do not have enough saved and invested. That's a fact, Jack. Friends don't let friends avoid reality. Family also has a responsibility to encourage, educate, cajole, or down right nag the younger generation into creating a financial plan and implementing it. If someone needs help doing this, I'll raise my hand and apply for the job. That's what a Certified Financial Planner does- helps folks plan their finances. Success needs some luck, plenty of hard work and gobs of persistence. Most of us would like to have at least > of our net take home pay when we retire. Who wouldn't like more? Social Security will do only so much. Pension plans only work if someone has one. Most of us have or should have Individual Retirement Accounts (IRAs). There are several types. Ask me about them. With limited space here's a simple example:

There are no guarantees in life except the two we all recognize. Here's the other way to say this. To our 30-year old: If you don't put away the money you won't have it when you need it.

Wishing you success,

Robert W. Brimmer, CFP™

BRIMMER FINANCIAL
rbrimmer@nationalsecurities.com
P.O. Box 2806 - 19 Brewster Cross Road - Orleans, MA 02653
tel. 508-240-0320 fax 508-240-2309 toll free 800-237-9322
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