Second Quarter 2009 Review

Clients and readers of our reports know we have maintained that volatility will be with us for a long time. This proved true again in the second quarter of 2009. Stocks posted their best quarter since 2003, which is yet another reason LCM Capital Management never tries to time the markets. The first quarter’s biggest loser, Russell 2000 Small Cap Index, was this past quarter’s best performing U.S. index jumping over 20%. That was closely followed by the mid-cap index, which rose almost 19% and the S&P 500, which rebounded nearly 16%. This confirms why LCM Capital Management diversifies across many asset classes both domestically and internationally. Additionally, the EAFE index soared by almost 24% last quarter claiming the honors for best performing major index. While these numbers are significant, we remind clients that our short-term views have not varied. Our belief is that the current rally is not the beginning of a new bull market, and this recovery will take longer than most “experts” are predicting. Last quarter’s fantastic performance illustrates why we continually have exposure to the equity markets, but will slightly underweight clients relative to their risk tolerances.

The fixed income markets suffered at the hands of equities with the benchmark 10-year treasury declining over 11% last quarter. This truly jaw-dropping move confirms our prediction that the treasury market is a bubble in the making. However, the increase in rates has yielded another opportunity for us to capture high quality corporate bonds, investment grade municipal bonds, and our favorite arena - inflation adjusted CD’s - at very attractive levels.

Moving forward, we expect to forfeit some of this rally as corporations continue to rein in analysts’ earnings expectations, which need more time to stabilize. Corporations must deleverage as they make further cuts and control expenses, and while this will contain any significant expansion near-term, it should set the stage for a moderate expansion that more importantly lasts for many years at slower than normal rates. This will not occur without a plethora of growing pains. Balance sheets will have to be cleaned up on the corporate and the government side of the ledger. Our auto industry will need to reinvent itself, which because of legacy costs, may be impossible. Housing will continue to suffer as banks and speculators, which were one and the same, finally admit that there will not be a quick recovery. Banks will also realize that the days of old are gone and they will have to resort to traditional ways of making money, i.e., the difference between rates they can borrow at and can lend at. Eventually they will lend again but it will take time for them to accept this lower risk, lower margin business. Unfortunately this will not stop them from creating the next financially engineered product, which only makes money for the house and not the clients as they move ahead of the regulation curve. This is one of the reasons we believe the retail brokerage industry, which was essentially saved by the banks, is going the way of the dinosaur.

We are living in an unprecedented time. The leveraged bubble of hedge funds, brokerage firms, banks, mortgage companies, private equity and venture capital firms are all trying to deleverage while our government is leveraging. Historically, governments tend to be less efficient and have high cost overruns, putting our tax dollars at stake. LCM Capital Management estimated that the total cost of the various government stimulus programs - TARP’s, TALF’s, PIPP’s, TABSLF, TLGPs, backups, guarantees, etc. – would reach $17-$18 trillion. We were wrong. According to Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (TARP), “The cost to stabilize and support the financial system will exceed $24 trillion.” Only two things can come from this - higher inflation and even higher taxes. Please consult LCM Capital Management or your LCM Capital Management Advisor to learn what you can do to protect your assets.

Now more than ever, make sure you know what you own, know what you pay and control your costs. While this sounds simple, consider how Wall Street continues to shroud itself in secrecy. Clients of LCM Capital Management know we take a tremendous amount of pride in managing these basic yet important factors and as a result, we received more client referrals last quarter than in any prior quarter. We thank you for this, and while our clients are not immune from losses, we believe that limiting one’s downside while participating in the upside inevitably yields long-term performance that far surpasses the competition.

Thank you for your continued trust, business and referrals as we build the most transparent, low-cost, fiduciary-focused money management firm in the country.

As always, should you have any questions, please call us at 312-705-3013, or email us at lcm@lcmcapital.com.

LCM Capital Management, Inc.

The view expressed reflects those of the authors as of the date of this commentary. Any such views are subject to change at any time based on market or other conditions, and LCM Capital Management (LCMCM) disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for LCMCM are based on numerous factors, may not be relied upon as an indication of trading intent on behalf of LCMCM. Thoughts about investing, the direction of the market, and individual securities are based on the author's own analysis and are not representative of actual future performance. Investing involves risk including the possible loss of principal.

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