Download The following is a special alert message from Bob Brinker that we

March 10, 2009
Dear Valued Clients:
Although each month we share Bob Brinker’s newsletter with you, I would like to remind you that Bob Brinker did
not foresee this economic downturn and, as a result, failed to take any precautionary action. However, here is an
excerpt of his March newsletter:
S&P 500: 696.33
“The Federal Reserve has issued its new forecast for the economy and we believe it is the best estimate
currently available in today’s environment. The Fed looks for real gross domestic product (GDP) in
calendar year 2009 to decline between 0.5% and 1.3%, followed by calendar year growth of 2.5% to 3.3%
in 2010. The Federal Reserve’s 2010 real GDP projection would bring the growth rate very close to its
long-term potential. The Federal Reserve forecast for unemployment is 8.5% to 8.8% in 2009, and 0% to
8.3% in 2010. Inflation is expected to remain dormant with a rate of 0.3% to 1% this year, and 1% to 1.5%
next year. We believe it is premature to worry about the return of high inflation given the underlying
economic fundamentals now in place.
“Although there is the potential for some improvement in the real GDP numbers during the second half of
this year, we would expect any improvement to be gradual as consumers and companies deal with the
credit market realities that are likely to improve slowly. Individuals must have access to credit in order to
buy house, cars and other big ticket items. The extent to which consumers can gain access to bank loans
impacts the extent to which the economy can recover. This underscores the importance of restoring the
banking system to good health. Corporate access to credit remains difficult for all but the highest rated
companies. Corporations with poor credit ratings that have debt maturing in 2009 will continue to face the
threat of insolvency in the absence of a white knight or an alternative form of financing.
“Federal Reserve Chairman Ben Bernanke told a congressional committee on February 24 that the
recession should end this year and 2010 “will be a year of recovery” if the financial markets are stabilized
by government policy initiatives. This raises the question of when the next economic recovery will begin
and how this relates to the stock market trend going forward.
“Looking back through market history, there has been a consistent correlation between the beginning of an
economic recovery and the beginning of a new stock market uptrend. Over the past half-century, with the
exception of the 2002-2003 market bottom which occurred well after the recession ended, in all of the other
six recession the stock market found a bottom in advance of the economic recovery. IN all six of these
cases the stock market began its major uptrend between three and five months prior to the begging of the
economic recovery.
“This timeline applies to the recessions that ended in February of 1961, November of 1970, March 1975,
July of 1980, November of 1982 and March of 1991. The deepest recession the past half-century saw a
peak-to-trough real GDP decline of 3.1% over a span of five quarters ending in March 1975. Toward the
end of this recessionary period, the stock market made a classic double-bottom.
“In the process of forming that double-bottom, the S&P 500 Index registered its initial closing low on
October 3, 1974, five months before the recession ended. This initial low was successfully tested for the
final time on December 6, 1974, three months before the recession ended. Despite the widespread
bearishness and the dire forecasts that prevailed in December 1974, the stock market rallied 73% over the
next 21 months.
“There are four key factors that have the potential to contribute to an improved economic outlook by the
second half of this year. These are:
1) Reductions in the individual tax rates for most consumers that will provide an additional $65
in monthly cash-flow, on average, beginning in April;
2) Very low interest rates which should have positive effect on consumer borrowing after
confidence is restored in the banking system;
3) Exceptionally stimulative Federal Reserve monetary policy aimed at restoring the economy to
its long-term growth track;
4) Infrastructure spending on projects that create jobs and economic activity.
“While any fiscal stimulus package leaves room for improvement, we view tax cuts for those with a high
propensity to consume and shovel-ready infrastructure spending favorably in terms of their economic
relevance. Clearly, a decisive move in the direction of long-term fiscal responsibility will be required after
the economy returns to its long-term growth trend.
“One of the most important challenges facing the government this year is the restoration of confidence in
the banking system. Although the very large banks are considered ‘too big to fail’, the reality is that their
balance sheet problems must be resolved in order to restore the health of the credit markets. The difficulty
in resolving the banking crisis revolves around the pricing of bad loans. A viable mechanism for pricing
these loans is required in order to deal with this problem. This subject is currently the focus of the Treasury
Department along with the Fed.
“We continue to favor some variation of the Resolution Trust Corporation model, which was used to
resolve the S&L crisis twenty years ago, as a means to remove the toxic assets from bank balance sheets
and restore the traditional bank lending model. We regard capital injections into banks as helpful if they
are linked to a plan to resolve the band loan problem. This is priority number one in terms of creating the
basis for the next economic recovery.
“The negative rate of growth for fourth quarter real GDP was revised at the end of February to 6.2% on an
annualized basis, as compared with the preliminary estimate of 3.8%. This figure reflects the heavy job
losses and the dysfunctional credit market conditions that prevailed in the fourth quarter. The entire fourth
quarter period reflected a credit marketplace that was essentially frozen, making it very difficult for
consumers and companies to acquire loans and make financing arrangements.
“Although credit market conditions have improved since the fourth quarter, we expect first quarter real
GDP to remain in negative territory as overall economic activity remains very sluggish. Second quarter
economic activity may show some improvement when compared to the first quarter, but we will have to
wait until the second-half of the year to see a possible return to positive economic growth.
“This remains the most difficult year we have seen to project S&P 500 Index operating earnings due to the
uncertainty surrounding the economic recovery timeline. We currently estimate $58, but 2009 earnings
visibility is low. As we move into the summer season, investors will begin to focus on 2010 earnings
prospects, which should show material year-over-year progress as the economy improves into next year.
“We are comfortable using a price/earnings midpoint of 16.5, within an overall range of 15 to 18, based on
very low inflation and interest rate prospects. This level of valuation would provide upside to the market as
the year unfolds and investors begin to look to 2010 earnings prospects as better gauge of corporate
earnings power.
“The process of establishing a major bear market bottom can extend over a period of several months, as we
saw in 2002-2003. Clearly, the process of registering the final bottom in this bear market has been
relentless, which has rendered our efforts to date unsuccessful. This is, by far, the most difficult stock
market we have ever seen. This is only the second time since the end of World War II that the year-over-
year decline in the S&P 500 Index has exceeded 35%. The other occurrence, in the fourth quarter of 1974,
was also accompanied by a very severe recession.
“Due to the fact that the November 20, 2008 S&P 500 Index closing low failed to hold during the testing
process, we believe a new bottoming process will be necessary in order to put an end to the bear market.
This means that in order to set the stage for a sustainable market advance, we need to see a sequence of
events consisting of (a) the establishment of an initial closing low; (b) a short-term rally; (c) a test of the
area of the initial closing low on reduced selling pressure. Going forward, we expect the combination of
aggressive monetary and fiscal policy measures, and initiatives to improve the health of the banking
system, to favorably effect the economy.”
Of course, any investment decision should be made after careful review of your individual financial situation, risk
tolerance, investment objectives, and time horizon. Please keep in mind that past performance is not necessarily
indicative of future results and you can’t invest directly in an index.
As you know, we use the Brinker newsletter as one of our sources of information for developing our market outlook
and recommending any changes to portfolios. We look forward to seeing you in the near future to review your
overall financial picture. Please do not hesitate to call us if you have any questions.
Yours truly,
Todd Stabler