Bad Days Bring Good Lessons

Should auld acquaintance be forgot
and days of auld lang syne?
For auld lang syne, my dear,
For auld lang syne,
We'll take a cup o' kindness yet
For auld lang syne

-Robert Burns (Lyricist)

As we wrap up 2008 it is important to reflect on both our actions and the actions of others in order to improve ourselves. Mistakes are embedded in human nature, but so is the ability to learn from them. Only our willingness to be honest with ourselves and others stands in the way.

It is true that our financial system is rooted in the confidence placed therein. Taken in this view, we can (and have) described it as a "con" game. It is also true that as long as confidence endures, the system works just fine with all participants benefiting from increased efficiency and productivity that comes from investment and consumerism.

The year 2008 holds important lessons for investors and it is important to explore them so as to avoid repeating them.

1.	Know your investment partner. Early in the year, many investors discovered their investment partner was working against them rather than for them. As executives of major brokerage houses were dumping auction rate securities and other trashy investments from their personal portfolios, they were at the same time advising clients to invest. The lesson here is to spend time with your investment partner not only with the goal of understanding the markets, economy, and investment strategy, but also to use your human nature skills to judge whether this person has your best interests at heart. At the end of the day, you cannot know everything there is to know about the investment community, but you should know whether you can trust your advisor to stand by you in the midst of battle.
2.	Educate yourself and others on rational expectations. No matter where your cash resides, it is your responsibility to ensure the safety, liquidity, and yes, even to achieve an appropriate return. Keep informed of market interest rate levels and what they mean for defining an appropriate return given your investment strategy. At the beginning of 2008 five percent seemed like an appropriate return for corporate cash investors. Today, zero may be appropriate. Were you aware of this dramatic change in expectations as it occurred or did you find out afterward?
3.	Ensure due diligence is performed. In many cases, this means doing it yourself. Don't ever be afraid to ask severe and probing questions of your investment partner. Any investment professional worth his salt should be happy to educate his or her clients and provide full transparency along the way. If at any point your gut tells you you've hit a wall of silence, realize there could be something wrong. Many times this year Ronald Reagan's mantra of "trust, but verify" popped into our heads. Suggestion number one above addresses the first half, but never forget the second.

Self-improvement requires self-analysis. Regardless of what 2009 brings, it is up to us to face the new and exciting challenges with better preparation and greater success than the past.

One other bit of human nature is the desire to exceed our goals. Here's to all of us exceeding our goals in the New Year!

Weekly Review

The holiday last week dictated light trading as market participants seem anxious to put 2008 to bed. Treasury yields declined for the seventh week in a row as zero yielding short bills are now the considered "normal." Once investors feel it is safe to go back in the water, bill yields will increase though at a moderate pace.

Key developments:

The Bureau of Economic Analysis' estimate of gross domestic product for the third quarter remained unchanged at -0.5 percent as expected by the markets. Estimates for fourth quarter action are much lower at -5.0 percent or worse.

Sales of existing homes fell 8.6 percent to an annual rate of 4.49 million units. Recently, this measure had been treading water around the 5.0 million mark where it bottomed after the tech bubble burst. Last week's release proved housing can get worse from here and with the recent spike in job losses, we expect further deterioration in this sector.

Recent weakness in the employment sector showed up in the income data last week as personal income declined 0.2 percent in November and both September and October data were revised downward. Continued deterioration will obviously maintain the downward pressure on consumption and the rest of the economy.