Fourth Quarter 2008
My Comments and Opinions

This past quarter reminds me of the fourth quarter of 1987, specifically October 19, 1987. Back then Wall Street firms had installed computer programs they called "portfolio insurance" which were instructed to sell whenever a given stock or stock index fell by a certain amount. On October 19^th the computers responded to some early selling and switched on with gusto. As each new lower price level was reached more selling ensued producing a downward-spiraling techno-cascade. The Dow Jones started the day at 2246 and closed at 1738, down 508 points or 22% (DJIA price history). Selling only stopped when the bell rang at 4:00 PM closing time. Today, investors everywhere are opening their December, 2008 portfolio statements to find a decrease in market value of anywhere from 20% to 40% or more from their January, 2008 values. I can't repeat this too often: Bear markets are temporary. They always have been. I believe they always will be. The market has never gone to zero. The Dow closed out 2008 at 8776.39, fully 7038 points higher than the October, 19, 1987 close. It took only one year for the Dow to go from 14164 on October 9, 2007 to the 8700 range. How fast or slow will the market be in returning to 14,000? No one can know the future, only the past. Past history suggests that the sooner governments and companies work together to solve problems the sooner profits will grow and markets respond with renewed enthusiasm and confidence.

Since 1900, almost without exception, each new market low has been higher than the prior market low and each new market high has been higher than the prior market high. It's the number of shares that you own, in my opinion, that's the key to long-term investment success. Unless you're taking withdrawals, you have about the same number of shares of companies or mutual funds today as you did a year ago when prices were much higher. When this Bear Market ends the next Bull Market will begin. You can only participate in the next up move if you own shares. Only fourteen months ago the Dow Jones Industrial Average (DJIA) was trading in the 14,000 range. This popular index closed at 8776.39 on the last day of 2008, about 16% higher than the low point of November 20, 2008, when the Dow ended that day at 7552.29. In numbers, the DJIA ended the year 1224.10 points higher from the lowest point of the year. The stock market is forward-looking. It anticipates a slower economy by going down and moves up in advance of a growing economy. The National Bureau of Economic Research confirmed early in December, 2008, that the U.S. entered the 11th post-World War II recession in December, 2007. The Bureau reported that the shortest recession since 1946 lasted 6 months while the longest was 16 months long. Ten months was the average duration of American recessions. The definition of a recession most often used by economists is: A period of two back-to-back quarters of declining Gross Domestic Product. Since 1946 there have been two deep recessions 1973-1975 and 1980-1981. Each recession has its own cause but the results I see are about the same - higher unemployment, declining tax revenue for government, overall declining business profits and the conviction among the public that the gloom will last for a very long time. The current wide spread pessimism recalls the Wall Street saying: "The crowd is always wrong."

As near as I can determine, this recession, which is global, began when too much credit began chasing too few qualified mortgage borrowers five or six years ago. The run-up in real estate prices followed the last Bear market in stocks. Money came out of equities and went into larger houses, vacation homes and even some mega-homes. Here are my thoughts on where we've been and how we'll move into the next growth cycle:

1. For the last several years too many semi-qualified or unqualified real estate buyers, swimming in a sea of easy credit, were encouraged by too many semi-qualified (perhaps even morally challenged?) lenders to get on board and sign up for mortgages they couldn't afford. Friendly, glad-handing lenders then proceeded to launch a flotilla of hopeful home owners onto the Ocean of Dreams in leaky deals. Sadly, many of these deals sank when home prices began to decline and the homeowners went upside down, owing more than their house was worth. This has led to a surplus of homes for sale and has kept downward pressure on residential real estate pricing.
   
   Last quarter I reviewed the history of how the U.S. Congress, through the Neighborhood Reinvestment Act of 1977, put a lot of pressure on U.S. banks in the 1990s to lend to less-than-creditworthy borrowers. www.brimmerfinancial.com. Newsletter - Third Quarter.
2. Easy-term, low interest mortgages fed an ever-growing appetite for more residential and commercial real estate. And so the real estate bubble was born. Prices were bid higher and higher until the bubble burst. The collapse of the real estate market caused a global credit freeze. How? Remember the GSEs, the Government Sponsored Entities - Fannie Mae and Freddie Mac? The GSEs and their creator, our very own "I'm from the Government, and I'm here to help you" Congress, were the government entities blowing hot air into the housing bubble. Bundles of these GSE-supported mortgages, frequently called mortgage-backed securities, were sold to investors all over the world by Wall Street firms.
   
   Problems quickly developed when banks and institutions wanted to know what these packages of various mortgages were worth as the real estate market began to sour. Unfortunately, the wretched accounting method of "Mark to Market" was required to set a market price for mortgage-backed securities. But this was impossible because as things got dramatically worse in short order no one had a clue what any of these mystery mortgages were worth, so.they simply plummeted in price, marked to no market at all. Banks, not trusting any other bank's balance sheet (which held these mortgages), stopped wiring overnight funds, stopped lending to each other and nearly caused the end of international commerce. That's when we experienced the global CREDIT FREEZE.
3. Enter the good guys. Out of a cloud of dust, with a hearty "Hi Ho Silver, Gold and anything else we can hock!" Dr. Bernanke and his sidekick Treasury Secretary "fast gun" Paulson rode in from their offices with solutions A, B, C, etc. They finally decided on a plan to borrow from ourselves a Trillion or more Dollars of fixer-upper cash. Their plans are starting to work. The banks are lending to one another. In defense of our good civil servants, to do otherwise would have driven the world back to Stone Age barter.
4. During operation Melt the Credit Ice Jam economic activity slowed dramatically world wide. Hedge funds, short sellers and all those who simply gave up sold their shares. I believe that their actions have had the exact same effect on the market as the computer-driven selling of October 19, 1987.
   
   This is my seventh Bear Market. I've been working in financial services through Three Papa Bears 1973-1975, 2000-2003, and 2008-; One Mama Bear 1987; and Three Baby Bears 1976-1978, 1981-1982, and 1990. The Dow Jones Industrial Average (DJIA) closed on December 6, 1974, at 577.6. On October 9, 2007, the DJIA closed at its all-time high of 14,164.53. This represents a DJIA gain of 13,586.93 points over 396 months which is about 33 years. Based on what I see this looks like it could have the makings of the GREAT COMPANIES OF THE WORLD 2009 BARGAIN SALE OF THE CENTURY (so far, that is). Isn't this a fantastic time to buy? Low prices, huge government efforts, pessimism all around - this is the stuff of opportunity. Do you really think your companies are all going to go out-of-business? This is a bad time to sell. Bull and Bear markets are just as natural as day follows night. We'll never repeal the law of supply and demand or cancel the business cycle. Add to your IRA, your 401(k), your personal accounts, your children's and grandchildren's accounts. Be brave if you believe in the creativity, discipline and persistence of those who are working at the great companies of America and the world. Own shares of these companies. Prices will rise, probably when least expected.
   
   Fear feeds upon fear; greed upon greed. Let me repeat Warren Buffett's advice: "Be fearful when others are greedy and be greedy when others are fearful." I haven't seen this much gloom since I entered the financial services industry in 1975. Looking ahead, I believe that the billions and trillions being pumped out of the Treasury Dept. will kick start the economy but will likely lead to future inflation. Governments pay their future bills by inflating their money supply, devaluing the currency. Tomorrow's currency will almost always buy less. When a ten-year U.S. Treasury Bond matures, its purchasing power may by diminished by a third to a half. Therefore it seems logical to me that traditional inflation fighters such as shares of growth stocks, real estate stocks, gold and other commodities equities belong in our portfolios in addition to income investments. The long-term 3% annual rate of inflation suggests that whenever quality assets go on sale investors should buy enthusiastically. I don't see an immediate inflationary surge. The cost of living will gradually increase, perhaps almost un-noticed for a while. But our money will lose purchasing power as each year passes.
   
   When this recession ends, and it will, global stock markets will have already been going up for some time having anticipated the next growth phase, assuming, of course, that they behave as they have in the past. We'll watch hedge funds come under Congressional scrutiny. I hope it does some good. Many old names on Wall Street have been gobbled up or are gone as a result of the credit freeze. National Securities Corporation, National Asset Management, Inc., Brimmer Financial Group and Robert W. Brimmer, CFP^TM are still here.
   
   I believe that you should increase the number of shares you own by buying low right now. Diversify with some inflation-sensitive asset classes. Pension plans, trust funds, endowments and mutual funds have to buy financial assets. The Trillions of Dollars sitting on the sidelines earning next to nothing will eventually move into other assets. Money goes where it's best treated. If money managers see more opportunity than risk in equities, won't they invest accordingly? Two Trillion Dollars sit on the sidelines earning next to nothing. No single portfolio or financial plan fits all. Call me to schedule a Review and Financial Planning update. Most of us dont plan to fail. Lots of us fail to plan.
   
   Please remember not to file your 2008 income taxes early because some investments may be late in reporting tax information to you. ALSO, for 2009 ONLY: IRA Minimum Required Distribution rules for most retirement plans were changed, allowing someone over age 70 = to suspend RMDs if they choose. Individuals turning 70= in 2009 will not have to take their first distribution by April 1, 2010. They will, however, have to take a 2010 RMD by December 31, 2010.

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. Dow Jones price history, The Wall Street Journal, The National Association of Realtors and the National Bureau of Economic Research were used for source material.

Wishing you success,

Robert W. Brimmer, CFP™

BRIMMER FINANCIAL
rbrimmer@nationalsecurities.com
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