'Pandelirium' 3

October 10, 2008

By Tim Chapman

I hate to keep going back to the 'pandelirium' theme but I'm not sure there is a real word in the English language that describes what's going on in the financial markets. I'm writing this note to you after the market close on Thursday October 9. One year ago today, both the Dow and S&P 500 set new all-time highs. What a difference a year makes.

Even though another bear market was inevitable, I don't think anyone could have foreseen the meltdown we've witnessed over the past two weeks. Since September 25th- only 9 trading days- the S&P 500 is down almost 25%!

One only has to turn on the news to hear plenty of stuff to worry about, but the same grandfather who coined the word �pandelirium' had another saying that applies to these times. He would say, "It ain't all bad, just what you're hearing is bad".

There is truth to that right now. We're being overwhelmed with a 'sky is falling' mentality, but there are actually some positive things to consider. First, as simple as it sounds to say it, we are obviously closer to the bottom, whatever it might be, than we were two weeks ago. History shows us that the average bear market since WWII lost about 35%. Since this time last year the S&P 500 is down almost 42%. As I've said so many times before, the market has gone down lots of times in the past but it's never stayed down, and it won't this time either. Most bear markets end in 'capitulation' which simply means fear finally takes over completely and investors, on a widespread basis, throw in the towel. We may be seeing capitulation right now, and in a contrary way that's a good thing because it could be a signal that the worst may be over.

It's also important for you to understand that our defensive posture has saved you from a considerable amount of the losses that have taken place. For example, if you are in the PMFM Managed portfolio, 100% of your account assets are currently in a U.S. Government securities money market fund. We also are in a maximum defensive position in our PMFM Core Advantage Satellite portfolio, where the minimum of 50% of your portfolio is exposed to the stock market, with the other 50% is in the safety of cash. (Both are almost a �widows and orphans' level of conservative!) As a result, while the S&P 500 is down more than 37% year-to-date, we are only down 5.3% in the Managed objective and 23% in the Core Satellite. Of course it's never fun to be down one penny, but as I said earlier, the stock market will recover; the S&P 500 will get back to new highs sometime in the future; and since we don't have as big a hole to climb out of, we will be adding positive returns while most investors are still working to break even.

Again, in a contrarian way of thinking, the market meltdown is a wonderful opportunity because stocks are �on sale'. If you add to your account while stocks prices are down, you are buying more shares each time you do than you could've bought previously. This �dollar cost averaging' not only reduces the overall loss for the year, it makes your break even come that much quicker! We have had some calls from worried clients who are thinking of getting out of equities altogether. Don't do it. You don't get these great buying opportunities that often. If anything, try to figure out how to increase your share holdings right now while prices are cheaper.

The bottom line is "it ain't all bad". Our country has had challenges before; the stock market has tanked before; politicians have been clueless before; but things won't be like this forever. The sun will shine on the market again and 2008 will just be a bad memory. But I hope one lesson is seared in your brain from this experience- bear markets are inevitable and it's important to have an investment strategy that takes that into account. You can win by not losing. We know that's true because we've been managing money that way at PMFM since 1991. 'Capture most of the good times, miss most of the bad times'. That's an approach you can sleep with!

I'm glad you are a PMFM client. We'll keep working hard to protect and- at the right time- to grow your hard earned account.

 

 

Past performance is no guarantee of future results. Investments are subject to risk, and any of PMFM's investment strategies may lose money.

Each of the PMFM Strategies involves active asset allocation, with an emphasis on risk management. The Managed Strategy is PMFM's more conservative strategy, and has the ability to invest 100% in money market instruments during difficult market conditions. The Core Advantage Strategy is PMFM's more aggressive approach in that it will always maintain a "core" position, or approximately 50% equity exposure to all market conditions. The remaining 50%, or "satellite", exposure is allocatied to equities or money market instruments based upon market conditions and risk levels of the market.

All performance reported above is gross of fees and does not take into account individual account management fees.

Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money. Investment return and principal value of an investment will fluctuate so that an investor's portfolio may be worth more or less than their original investment. The investment strategy presented is not appropriate for every investor and individual clients should review with their financial advisors the terms and conditions and risk involved with specific products or services. Stadion's actively managed portfolios may underperform during bull markets.