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Here it is 2009 already and what most people appear to have on their minds is, "What's going to happen to the national economy?" And, even more importantly, “How should I adapt to this downturn?”

If I knew specifically, I wouldn't bother writing this newsletter. I'd take everything I have and invest accordingly. As it is, I am investing a lot. But, like all human beings, I like the security of taking smaller steps on surer footing.

I do, however, have a pretty good idea as to what will happen in a broader sense. #But, before I get to that—let’s take inventory of the advice I’ve given in the past, what I actually did by way of [*Rule: Diversify] diversification prior to the recent market plummet, and what rules of investing are most at play under current circumstances.

Unlike most Americans, I’m sure, I had at least sixty (60%) of my family’s retirement funds and savings in cash or money market funds. In mid-September, like everyone else, I had a few days to be startled over that precipitous drop in the markets, the overall state of general panic regarding the financial meltdown and tested the banking system, looking for FDIC protection. But that’s a different article for another day. It was, however, a real eye opener to see how the brokerage houses and banks responded in the short term--disappointingly, I must say, at least as to the banks.

The reason I had so much in cash, relative to other investments, is twofold: 1. I didn’t trust Wall Street; and 2. There have been precipitous stock market drops in the past, with little or no warning, occurring at sufficient intervals to make me cautious. The last such drop before the current one that began in September, 2007 began in September, 2000 and ended a little over six years ago in August of 2002. For ease of discussion, let’s call that “Boom A.”

To enable you to best follow along, I have embedded a chart, below, which shows the Dow Jones Industrial Average in black, the Standard & Poor’s 500 index in red and the NASDAQ Composite Index in gold. It shows the performance of each of these market indices, since 1928. For the balance of this article, I will be referring to these indices collectively as “the markets,” unless I specify another meaning, such as bonds, real estate or foreign investments.

With a little scrutiny, you can easily see that there was relatively steady growth in the markets from 1928 until, say 1985. The autumn-of-1987 precipitous drop stands out in the graph. I marked it with an "X." But, after that there is steady, almost uninterrupted growth until early 2000, AKA the dot-com bubble, or Boom A, as we’re calling it.

Then, there was a drop that began before the infamous 9-11-2001 terrorist plane crash into the World Trade Center that ended in the fall of 2002, followed by another rise and precipitous drop. Let’s call that Boom B.

Here, I’ll mark those on the graph:

To understand where the markets are headed, it is necessary to have as clear as possible of an explanation as to why they have been where they were.

The rise from 1985 into early 2000 is by most accounts attributable to the technological boom of the 1990’s. Yes, it got overestimated in terms of near term prosperity and ultimately got devalued by a large margin. But, remember, the tech. boom has never ended, since inception. The rate of growth may have stabilized and there may have been doldrums in terms of tech. sales, but the boom itself (AKA technological advancement) continues to spiral onward and upward, if anything, at an accelerated rate, given the synergistic benefits of the internet and the ability of science and industry to use the newer technology already in place.

So, why the precipitous rises and falls?

This brings us to one of the “basic rules of investing,” all of which are all contained in my book in progress, The Truth About Investing. It's subtitle is aptly, Including the Basic Rules of Investing, which almost no one ever follows. If you are interested in being on the notification list, please send us an email at truth@danoconnnor.com, or use THIS FORM and refer to the book in progress you are interested in.

*Rule: Things are never as good or as bad, as they seem. I could have hedged by replacing the word “never,” with the word, “seldom,” and, strictly speaking, this may be true. But, knowing investors as I do after 35 years, or so, of investment consulting and market analysis, the average investor would be far better off to just forget the word “seldom,” and pretend it doesn’t exist.

The facts on the ground, regarding the tech. growth and its implications, have remained steadily in place. What has changed is investors’ analysis of (or emotional reaction to) them. Ever hear the terms, “irrational exuberance,” ala Alan Greenspan, the former Federal Reserve Board Chairman?

If all we had to graph was the impact on business of the tech. boom, sans “irrational exuberance,” the curve would likely have a slope more like what we saw between 1985 and 1995 for the S & P 500 and less like what it looks like thereafter. I’ve drawn a blue line on our graph (repeated below) to illustrate the logical extension of this phenomenon before the exuberance set in.

If it’s a tech. boom, then why does its effect show up more in the S & P 500 than it does in the NASDAQ itself? Because the implications of the tech. boom actually has had a more resounding long term impact on other industries than it has on the tech. businesses in particular. Ever hear of downsizing?

Now let’s take a closer look at Boom B. By focusing on the 2002-2007 sharp market rise, it’s pretty easy to see in retrospect that it arose from what is commonly referred to as the housing boom, which, upon close scrutiny, was really a credit boom, NOT a real increase in the value of homes. Home values in the aggregate in the long term can only be sustained to the extent of the buying power of the underlying home buyers and owners, who must service their mortgages. Any other gains are illusory and, hence, temporary—short term in nature and as subject to an economic downdraft, as a house of cards.

This brings us to another of my “basic rules of investing,” to wit, *Rule: Every boom is followed by a bust. Unfortunately, the opportunity to benefit financially from the rule just described, this time around, has already passed for this business cycle. But, do make a note of it. It will become relevant time and time again in the future.

“So, we’ve gone boom, bust, boom, bust. What next?” Unless some fundamental things change, I think we’re headed for our third successive boom, bust scenario. Yes, I think Keynsian economics will work in the stimulus package, just as we were taught in basic economic courses that it would. The problem is that unless the longer term “fundamentals of the American economy are improved,” we’ll only be setting ourselves up for another bust.

What are those fundamental things? They’re things like the balance of trade deficit, our dependence on fossil fuels as our primary energy source (notice, I didn’t just say “foreign oil”), the degree to which we train those in/for our society, who are most capable of innovation and productivity (e.g., engineers), the way in which our government is managed (i.e., fiscally responsible or not) and so on. The more of these things we can and/or choose to correct (further explained in other articles), the better our chances for long term sustained growth. We also need to foster some growth industries. My first pick(s) at present would be energy related. But, there is also biotech., genetic engineering, other similar possibilities and computer technology. The U.S. may or may not find itself as a world leader in any or all of the foregoing, depending on our decisions during the next few years of transition.

Whether it’s boom, bust again, or steady growth, the chips which have recently fallen to present market depths spell out a compelling approach to investing. It’s time to go long on stocks, not all at once, but gradually in my opinion. Ever hear of buying low and selling high? How many people do you know who actually do that? You’re presently reading an article by one such person.

I realize there may be catastrophic world events that could send the markets further into a tail spin, but, barring that, I think they’re at or near their Boom-B-bust lows and about to enter Boom C—not the economy, mind you, but its leading indicators. I am convinced that the Obama economic plan will work, even if it has to be further modified and strengthened after the present iteration. The question is, “How long will it take to take hold and what intervening, unexpected events could derail it?” I figure that if there is a catastrophic event, whether we’re in cash or not won’t make all that much difference. Besides, I’m more of an optimist than that.

I’m dollar cost averaging into the market at present—calculated over the next 24 months—so that I can cash in on the upswing I anticipate. When? In about 6 to 8 months if I had to guess. But, here’s something you may not have thought of. Just as when the markets drop precipitously, they also surge without notice. That’s why they say that you should not yank your money out at the first sign of a possible downturn. You can miss the updraft, as well, which is equally as devastating as the converse in terms of maximizing (or not) the long term growth of your asset portfolio.

However, unless I see some fundamental changes in the American economic philosophy, coupled with sound public policy, I will no sooner see an upturn in progress than I intend to reverse my investment philosophy and begin pulling money out of the markets in anticipation of the next bust. I didn’t create these realities. I am only trying to recognize what “is” and adapt to it.

If, perchance, the endemic, long term problems implied four paragraphs above begin to be solved and the country all of a sudden becomes prudent and starts acting in the best interest of its citizenry (vs. big business, such as oil companies), then we could have a financially gratifying, long term ride ahead of us in the years and months to come. Don’t expect anything too soon though. Again, if I had to guess, you’ll begin starting to see the sun peak through about six to eight months after the stimulus package in whatever form passes Congress.

“Bon la chance!”

*Note: *Rule is used to designate each of the basic rules of investing mentioned above. All such rules are contained in the aforesaid Truth About Investing book. Please use THIS FORM to express your interest, should you wish to be placed on the interest list. Mention the name of the book(s) in progress you are interested in.

Note: I am providing this commentary on current legal developments as a pro bono public service. [In Hawaii, we are encouraged to do lots of this.] It should not be considered legal advice, as that depends on many facts and circumstances and individual situations to which I am not privy. Receipt of this article does not establish an attorney-client relationship and should be viewed as one person’s perspective on prospective developments to which reasonable minds could differ.

N.B., the author hereof is licensed to practice law in California and Hawaii. Individual consultations are not available to those in other states, wherein all federal legal implications must be further evaluated within the context of local law. All investment advice given on an individual basis is incidental to the author’s law practice, which has a firmly established policy that all attorney-client relationships be documented with an initial engagement letter or memorandum. If you do not have a currently active and valid written, mutually signed agreement on file, then you are not a client.

Our current feature article appears here:
	U.S. Stock Market Outlook 2009
	Here it is 2009 already and what most people appear to have on their minds is, "What's going to happen to the national economy?" And, even more importantly, “How should I adapt to this downturn?” If I knew specifically, I wouldn't bother writing this newsletter. I'd take everything I have and invest accordingly. As it is, I am investing a lot. But, like all human beings, I like the security of taking smaller steps on surer footing. I do, however, have a pretty good idea as to what will happen in a broader sense. #But, before I get to that—let’s take inventory of the advice I’ve given in the past, what I actually did by way of *[Rule: Diversify] diversification prior to the recent market plummet, and what rules of investing** are most at play under current circumstances. Unlike most Americans, I’m sure, I had at least sixty (60%) of my family’s retirement funds and savings in cash or money market funds. In mid-September, like everyone else, I had a few days to be startled over that precipitous drop in the markets, the overall state of general panic regarding the financial meltdown and tested the banking system, looking for FDIC protection. But that’s a different article for another day. It was, however, a real eye opener to see how the brokerage houses and banks responded in the short term--disappointingly, I must say, at least as to the banks. The reason I had so much in cash, relative to other investments, is twofold: 1. I didn’t trust Wall Street; and 2. There have been precipitous stock market drops in the past, with little or no warning, occurring at sufficient intervals to make me cautious. The last such drop before the current one that began in September, 2007 began in September, 2000 and ended a little over six years ago in August of 2002. For ease of discussion, let’s call that “Boom A.” To enable you to best follow along, I have embedded a chart, below, which shows the Dow Jones Industrial Average in black, the Standard & Poor’s 500 index in red and the NASDAQ Composite Index in gold. It shows the performance of each of these market indices, since 1928. For the balance of this article, I will be referring to these indices collectively as “the markets,” unless I specify another meaning, such as bonds, real estate or foreign investments. With a little scrutiny, you can easily see that there was relatively steady growth in the markets from 1928 until, say 1985. The autumn-of-1987 precipitous drop stands out in the graph. I marked it with an "X." But, after that there is steady, almost uninterrupted growth until early 2000, AKA the dot-com bubble, or Boom A, as we’re calling it. Then, there was a drop that began before the infamous 9-11-2001 terrorist plane crash into the World Trade Center that ended in the fall of 2002, followed by another rise and precipitous drop. Let’s call that Boom B. Here, I’ll mark those on the graph: To understand where the markets are headed, it is necessary to have as clear as possible of an explanation as to why they have been where they were. The rise from 1985 into early 2000 is by most accounts attributable to the technological boom of the 1990’s. Yes, it got overestimated in terms of near term prosperity and ultimately got devalued by a large margin. But, remember, the tech. boom has never ended, since inception. The rate of growth may have stabilized and there may have been doldrums in terms of tech. sales, but the boom itself (AKA technological advancement) continues to spiral onward and upward, if anything, at an accelerated rate, given the synergistic benefits of the internet and the ability of science and industry to use the newer technology already in place. So, why the precipitous rises and falls? This brings us to one of the “basic rules of investing,” all of which are all contained in my book in progress, The Truth About Investing. It's subtitle is aptly, Including the Basic Rules of Investing, which almost no one ever follows. If you are interested in being on the notification list, please send us an email at truth@danoconnnor.com, or use THIS FORM and refer to the book in progress you are interested in. Rule: Things are never as good or as bad, as they seem.* I could have hedged by replacing the word “never,” with the word, “seldom,” and, strictly speaking, this may be true. But, knowing investors as I do after 35 years, or so, of investment consulting and market analysis, the average investor would be far better off to just forget the word “seldom,” and pretend it doesn’t exist. The facts on the ground, regarding the tech. growth and its implications, have remained steadily in place. What has changed is investors’ analysis of (or emotional reaction to) them. Ever hear the terms, “irrational exuberance,” ala Alan Greenspan, the former Federal Reserve Board Chairman? If all we had to graph was the impact on business of the tech. boom, sans “irrational exuberance,” the curve would likely have a slope more like what we saw between 1985 and 1995 for the S & P 500 and less like what it looks like thereafter. I’ve drawn a blue line on our graph (repeated below) to illustrate the logical extension of this phenomenon before the exuberance set in. If it’s a tech. boom, then why does its effect show up more in the S & P 500 than it does in the NASDAQ itself? Because the implications of the tech. boom actually has had a more resounding long term impact on other industries than it has on the tech. businesses in particular. Ever hear of downsizing? Now let’s take a closer look at Boom B. By focusing on the 2002-2007 sharp market rise, it’s pretty easy to see in retrospect that it arose from what is commonly referred to as the housing boom, which, upon close scrutiny, was really a credit boom, NOT a real increase in the value of homes. Home values in the aggregate in the long term can only be sustained to the extent of the buying power of the underlying home buyers and owners, who must service their mortgages. Any other gains are illusory and, hence, temporary—short term in nature and as subject to an economic downdraft, as a house of cards. This brings us to another of my “basic rules of investing,” to wit, Rule: Every boom is followed by a bust.* Unfortunately, the opportunity to benefit financially from the rule just described, this time around, has already passed for this business cycle. But, do make a note of it. It will become relevant time and time again in the future. “So, we’ve gone boom, bust, boom, bust. What next?” Unless some fundamental things change, I think we’re headed for our third successive boom, bust scenario. Yes, I think Keynsian economics will work in the stimulus package, just as we were taught in basic economic courses that it would. The problem is that unless the longer term “fundamentals of the American economy are improved,” we’ll only be setting ourselves up for another bust. What are those fundamental things? They’re things like the balance of trade deficit, our dependence on fossil fuels as our primary energy source (notice, I didn’t just say “foreign oil”), the degree to which we train those in/for our society, who are most capable of innovation and productivity (e.g., engineers), the way in which our government is managed (i.e., fiscally responsible or not) and so on. The more of these things we can and/or choose to correct (further explained in other articles), the better our chances for long term sustained growth. We also need to foster some growth industries. My first pick(s) at present would be energy related. But, there is also biotech., genetic engineering, other similar possibilities and computer technology. The U.S. may or may not find itself as a world leader in any or all of the foregoing, depending on our decisions during the next few years of transition. Whether it’s boom, bust again, or steady growth, the chips which have recently fallen to present market depths spell out a compelling approach to investing. It’s time to go long on stocks, not all at once, but gradually in my opinion. Ever hear of buying low and selling high? How many people do you know who actually do that? You’re presently reading an article by one such person. I realize there may be catastrophic world events that could send the markets further into a tail spin, but, barring that, I think they’re at or near their Boom-B-bust lows and about to enter Boom C—not the economy, mind you, but its leading indicators. I am convinced that the Obama economic plan will work, even if it has to be further modified and strengthened after the present iteration. The question is, “How long will it take to take hold and what intervening, unexpected events could derail it?” I figure that if there is a catastrophic event, whether we’re in cash or not won’t make all that much difference. Besides, I’m more of an optimist than that. I’m dollar cost averaging into the market at present—calculated over the next 24 months—so that I can cash in on the upswing I anticipate. When? In about 6 to 8 months if I had to guess. But, here’s something you may not have thought of. Just as when the markets drop precipitously, they also surge without notice. That’s why they say that you should not yank your money out at the first sign of a possible downturn. You can miss the updraft, as well, which is equally as devastating as the converse in terms of maximizing (or not) the long term growth of your asset portfolio. However, unless I see some fundamental changes in the American economic philosophy, coupled with sound public policy, I will no sooner see an upturn in progress than I intend to reverse my investment philosophy and begin pulling money out of the markets in anticipation of the next bust. I didn’t create these realities. I am only trying to recognize what “is” and adapt to it. If, perchance, the endemic, long term problems implied four paragraphs above begin to be solved and the country all of a sudden becomes prudent and starts acting in the best interest of its citizenry (vs. big business, such as oil companies), then we could have a financially gratifying, long term ride ahead of us in the years and months to come. Don’t expect anything too soon though. Again, if I had to guess, you’ll begin starting to see the sun peak through about six to eight months after the stimulus package in whatever form passes Congress. “Bon la chance!” Note: Rule is used to designate each of the basic rules of investing mentioned above. All such rules are contained in the aforesaid Truth About Investing book. Please use THIS FORM to express your interest, should you wish to be placed on the interest list. Mention the name of the book(s) in progress you are interested in. Note: I am providing this commentary on current legal developments as a pro bono public service. [In Hawaii, we are encouraged to do lots of this.] It should not be considered legal advice, as that depends on many facts and circumstances and individual situations to which I am not privy. Receipt of this article does not establish an attorney-client relationship and should be viewed as one person’s perspective on prospective developments to which reasonable minds could differ. N.B., the author hereof is licensed to practice law in California and Hawaii. Individual consultations are not available to those in other states, wherein all federal legal implications must be further evaluated within the context of local law. All investment advice given on an individual basis is incidental to the author’s law practice, which has a firmly established policy that all attorney-client relationships be documented with an initial engagement letter or memorandum. If you do not have a currently active and valid written, mutually signed agreement on file, then you are not a client. 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