2008 Year End ReviewSince founding LCM Capital Management many years ago, this has been the most difficult market we and our clients have had to endure. On January 20, 1981 Ronald Reagan said in his inaugural speech, “In this present crisis, government is not the solution to our problem, government is the problem.” Fast forward 17 years to September 27, 2008 and Barney Frank told the world, “The private sector got us in this mess. The government has to get us out of it.” Prepare for a deleveraging of the private sector into a leveraging of GLOBAL governments. This subtle seismic shift is why LCM Capital Management started adjusting our client’s holdings over a year ago. While on the equity and fixed income side we avoided most major blow-ups and bankruptcies, there were few safe harbors. For the second consecutive year, the best performing asset class was the U.S. Treasury Bond. As it did in 2007, this asset class benefited from a flight to quality, so much so that this has become the new bubble. We do not need to dwell on how the equity portion of the market fared, but the devastation was unprecedented, sparing no one. The S&P 500 had 35 daily movements of 3% or more making 2008 the most volatile year ever. LCM Capital Management clients know that we believe volatility will be here for the foreseeable future. The S&P 500 lost 37%, its worst calendar year performance since 1931. It lost 22% in the 4th quarter alone, surprisingly only the 7th worst quarterly loss on record. The Dow plunged by over 33%. The Small Cap Russell 2000 Index lost over 34%, its worst calendar year performance ever. The NASDAQ fell over 40%, the worst decline in its history. The worst major index decline however was saved for the EAFE International Index. It lost over 45% of its value. Clients and readers of our updates will remember that we warned that the international and emerging markets had become bubbles. Additionally, the idea that emerging markets would decouple – that is, the notion that countries like Brazil, Russia, India or China would continue to grow regardless of a downward shift in global demand from developed nations – has been put to rest. These markets plunged 56%, 73%, 65% and 50% respectively, destroying many years of “growth.” For over a year we have discussed the proverbial corner into which Fed Chairman Bernanke has “painted” himself, concerned about inflation and the economy’s lack of growth. The path he chose is unprecedented in the U.S., cutting the Fed Funds rate to essentially zero. Consequently, treasuries have rallied, rates have plummeted and investors have rushed to safety at the expense of yield, leading us to conclude that U.S. Treasuries will be the next bubble. Countries around the world are cutting interest rates to historic lows in an attempt reignite their economies. Eventually, this worldwide concerted effort will begin to take hold and the recovery will follow. This eventually triggers another problem, one where interest rates begin to climb forcing bond prices to decline. Since many investors now own bonds and bond funds, as everyone starts selling, a movement in treasury bonds will occur as never before seen. This is one of several reasons we have not been buying treasuries as of late. Additionally, efforts by our central bankers as well as our newly elected officials to stimulate our economy will inevitably lead us toward a period of rapid inflation. How long it will last or how high inflation will go are unknown. For these reasons, as we’ve reported previously, we will continue to buy inflation protected CD’s and TIPS (Treasury Inflation Protection) which still offer great value if one looks out a few years. Staying on our bond theme, this financial crisis has caused the spread between treasuries and high quality corporate bonds as well as municipal bonds to reach levels not seen since the Great Depression. The downside of this is that it has become very expensive for companies and municipalities to issue debt, but for bond buyers like LCM Capital Management, it has created an opportunity of a lifetime for our clients. Regarding equities, as mentioned in previous reports, we eventually will be turning our attention to down-trodden names and sectors. Although equity prices, earnings and tangible book values have been beaten down, until companies begin releasing 4th quarter results, we find no reason to overweight this asset class. Additionally, LCM Capital believes that dividends will have to be significantly reduced before equities can resume a move upward. We have a very difficult time accepting how companies like Morgan Stanley, who are in need of cash, can rationalize spending more than $1 billion a year in dividend payments while issuing debt that pays over 10% a year. What gives us long term hope is the following: for the 10 year period just ended, the average annual stock market return reached a record low of -1.5%, the previous record low occurring in 1938. Using history as our guide, when the stock market returned less than 2.5% annually over a 10 year period, it returned an average of 13.3% for the next 10 years.* Of course, historical results are not predictions of future returns, but we believe history will eventually repeat itself. The 2008 global markets will live in infamy. They will be studied, talked about and relived forever. We look to 2009 not as a year of change, but as a time to rebuild. The self-centered world of Wall Street is extinct. Our conviction is that 2009 will be the year a new foundation is constructed, one which will benefit the clients of LCM Capital Management; a firm that believes in full transparency and low cost, a firm that puts its client’s interests and well-being ahead of its own (yes, a novel approach), a firm that believes that slow and steady wins the race, a firm that always appreciates your business, trust and continued referrals. LCM Capital Management, Inc. *Source: Global Financial Data |