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Notes to myself, possibly of interest to others.
-- Bill Northlich

Monday, January 19, 2009

Stock market down in medium time-frame

All bets and predictions to the upside of the stock market have as their common foundation a belief that the combined spending of the government, at unprecedented levels, combined with extremely low guaranteed interest rates (i.e., my "cattle prod") will lead the herd to a market recovery and stem the recession tide. For a lot of investors who have experienced 30% to 70% losses, the stock market is a thing of the past; however, the stock market is not dead. Short-term the market is a voting machine; long-term it is a weighing machine. In my opinion, we remain in a secular bear market that began in 2000. However, we will experience "mini-bull" markets and "mini-bear" markets during the secular bear that will probably last until 2014. One of the great sucker plays since the bear began in 2000 has been the "buy and hold for the long term" mantra that has been chanted by the sages of Wall Street. Simply look at the returns: from 12/31/99 to 12/31/08, if you invested in an S&P 500 index and held for "the long term," then your total return during this time would have been -28.13%, or an annualized rate of -3.6% per year. Small caps were better, with a total return of 11.66% or 1.23% annualized. If you expect to make money in the equity markets in 2009 going forward, then you must be willing to "trade" the volatility while also maintaining a high proportion of income-producing assets.

Cliff W. Draughn, Managing Principal, Draughn Partners

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