Third Quarter 2008
My Comments and Opinions

During the Third Quarter China hosted the Olympics and Russia invaded ancient independent Georgia. In America we held our political conventions and selected the standard bearers for high office. Oh, yes, lest we forget, the American financial system underwent the most dramatic metamorphosis in eighty years. Major Wall Street firms that existed for generations disappeared into the maws of larger organizations. Merrill Lynch, Bear Stearns, Lehman Brothers! The Who's Who of Wall Street are now the Who's Left!

The three boom-bust cycles I discussed in last quarter's letter have finally entered, in my opinion, their final stages of cleansing. That's not to say any of us have a crystal ball to read the future. One recent cartoon currently making the rounds shows a broker who tells his client that he actually does have a crystal ball, the one on his desk, but he doesn't know how it works. The last time the U.S. financial system experienced such a dramatic event was in the early 1930s. During the years of the Great Depression (as it's called because it was a Great big depression) the Federal Reserve and Congress zigged when they should have zagged in their ignorant efforts to fix the growing problem of bank failures. The federal government made money less available, hoping to squeeze the depression out of the economy. Interest rates were raised, not lowered. There was no FDIC insurance for depositors. And then the coup de grace - Congress passed the horrendous, near suicidal Smoot-Hawley Tariff, with its reciprocal trade restrictions which exacerbated the downward business spiral in America and forced a global economic depression which lasted until after World War II. A stock market correction became a disaster as government's fix made the problem worse.

Our current Federal Reserve Chairman is a scholar and a student of the Depression. I believe that he understands that what is happening now in the credit markets is similar in many ways to what happened in the stock market and spilled over into the global economy eighty years ago. He has every intention of preventing a repeat of the 1930s. Instead of tightening credit, Chairman Bernanke has stated that credit must be unfrozen. The Fed has poured billions of dollars into our banking system. Credit is the act of trusting someone or some entity (a country, a business, a state or city) with money that is expected to be paid back with interest. There seems to be widespread mistrust that any money that is loaned will not be paid back. The central job of the Federal Reserve is to make sure that our economy has a better than even chance of running smoothly without either high inflation or low deflation (a depression). The Fed is charged with the job of making our economic ship stay on course "steady as she goes." The Fed can make money available to the banking system when money is in short supply or "tight" and take some money out of circulation when money is too abundant or "loose".

This back and forth, supply and demand movement of money in circulation helps the flow of credit. This is an enormously complex matter because there are all sorts of credit arrangements and durations from ultra short-term to very long-term. Suffice it to say that our Fed, in my opinion, knows what's at stake and is prodding the Congress to take action, which will have happened, I hope, by the time you receive my letter.

Our friendly neighborhood mortgage companies or banks may have sold our home mortgages to one of the quasi-governmental entities, Fannie Mae or Freddie Mac, in a bundle of other mortgages, further complicating the credit (or lack-of-credit) problem. The efforts being made in Washington, Dysfunctional City resemble a juvenile food fight. The partisans should seek the good of our country. Careful observation of their goings-on reveals business as usual: "He said, she said" "No I didn't, it's your fault." I humbly suggest that we re-elect no one. A personal note: My reading of our nation's Founders leads me to believe that they never intended that we should have a permanent chattering political class. The concept of politicians in office for life was abhorrent to Washington, Jefferson, Madison, Monroe, and Jay, among others. Before women's rights were finally recognized in law and before equality among the races was stated in law, the men who set the course for the United States of America wrote that men of good character and legal standing should serve their fellow citizens for a time, to return home to their private pursuits.

Real Estate Lending Tidal Wave - More on Mortgages

If you were out in the deep ocean, a tidal wave could pass under your ship and you might notice only a gentle swell. As the tsunami wave neared shallow coastal water the pent up energy of the wave would become concentrated, rise up and swamp everything on the beach and further inland in an unstoppable flood of destruction. Both here and in other markets abroad, real estate experienced an increase in value beyond historic norms beginning some time in the early years of this decade. Money flowed out of the stock market following the Dot.Com Bubble Bust and into real property. Low interest rates, easy credit made available via quasi-governmental organizations, specifically Federal National Mortgage Association "Fannie Mae" and Federal Home Loan Mortgage Corp. "Freddie Mac" and others, Federal laws that mandated lending to individuals with less-than-ideal credit including the Community Reinvestment Act of 1977, and a generous helping of company mismanagement, lack of government oversight, greed and corruption (both Fannie Mae and Freddie Mac's lobbyists paid millions to politicians over the last three decades) all met on the beach and made a mess of mortgage markets in many countries. The conditions that led to this tidal wave went undetected or ignored by most of us. As long as real estate prices were going up, everything was OK. There was a show on television called "Flip That House" that followed the speculative practices of home buyers who would buy, fix up, and then, they hoped, sell the house as quickly as possible for as much short-term profit as possible. I haven't seen that show lately.

In my opinion, it's impossible to foresee the top or bottom of any cycle. The discipline I recommend is buy, buy more, buy more again and hold for life. During retirement years when investments produce cash flow, a well diversified portfolio is the best defense against loss of purchasing power. The primary caveat is this: Avoid withdrawing too much. Too much is a percentage of the portfolio that exceeds the average growth rate of the portfolio. Another good rule to follow is this: Don't panic. America will find a way to stabilize the credit markets. The equity markets will follow.

As you know, I am a believer in Dollar-Cost Averaging, the process of buying shares on a regular basis based on the calendar, not the price per share. If you are a month by month investor, add to your account ignoring the price per share. During the so-called "good years" prices are high. Your regular additions will buy fewer shares at the higher prices. During the years that are called "the bad years" prices are lower. Your regular investment buys more shares. So, as you can see, good is bad and bad is good. Got it? The object of the investment discipline is to accumulate as many shares as possible during your working years so you will have as many shares as possible during your retirement years. During the years when lots of people are staying away from the market, prices are bargain-priced. When they all come rushing back in, all of your shares should rise in price because of the renewed buying. Prices go up. Prices go down. As long as you keep up on your mortgage payment your house doesn't disappear. As long as you don't sell your shares they don't disappear.

My most senior clients, those in their 80s and 90s, who have held on, rebalanced and added to their investment portfolios over decades, are living proof that this discipline produces the best results. I don't know of any one person or system that can produce consistent positive gains by jumping in and out of the market.

Do yourself a big favor. Add to your investments each and every month, even if it's only a few dollars. Money not invested today will not compound for you over the next ten, twenty, thirty, etc. years.

There are three investment ideas that I believe deserve your attention. In the future we will all need clean water and more of it, clean energy, and more and purer food. Ask me about my Three Amigos.

Disclosures

The views expressed contain certain forward-looking statements. Although they are forecasts, actual results may be meaningfully different. This material represents an assessment of the market at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any security in particular. The Friday, October 3, 2008, Wall Street Journal article entitled How Government Stoked the Mania which appeared on page A21 explains in greater detail the history of the mortgage problems facing us today.

Annual Financial Check List

At the beginning of the fourth quarter of each year I mail this check list to my clients as a reminder to take inventory of the components of their financial plan. If there's anything on this list that needs attention, call me. Put a check mark next to each item that you believe is in good order.

_________ Up-to-Date Will
_________ Up-to-Date Trust
_________ Current Durable Powers of Attorney
_________ Health Proxy or Living Will
_________ Adequate Health Insurance: Hospitalization/ Major Medical
_________ Adequate Long-Term Disability Insurance
_________ Adequate Long-Term Care Insurance
_________ Adequate Property/Casualty Insurance: home, car, umbrella coverage
_________ Adequate Professional Practice/Business Owner Insurance
_________ Adequate Life Insurance
_________ Review Beneficiary Designations on IRAs, Retirement Plans, Annuities, and Life Insurance Policies.
_________ Annual Charitable Contributions Made Before Year-End
_________ Annual Gifts Made to Family Before Year-End
_________ Collect Cost Basis Information on Sold Securities/ Real Estate for Income Tax Filing
_________ Portfolio Review
_________ Portfolio Adjustments to Minimize Taxes
_________ Timely Contributions Made to Retirement Plans
_________ Required Minimum Distributions from IRAs for clients over 70.5 years of Age (Distributions should be taken well before the December 31st annual deadline)
_________ Tax Planning with Your Tax Advisor Before Year-End
_________ All Those "Other" Things You Meant To Do Before Year-End

I work with people who need and want help with their financial planning. If you know of others who need help, have them call me. I'll be happy to meet with them in person or on the phone to answer questions or make referrals to other professionals as appropriate.

Wishing you success,

Robert W. Brimmer, CFP™

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