Much has already been written about the causes of 2008’s market collapse.  Similar to the Crashes of 1929 and 1987, academics will proffer and debate theories about the factors behind last year’s correction for decades to come.  We do not wish to devote this letter to a recapitulation of many unpleasant topics.  Instead, we will use this letter, first, to wish our clients and friends a Happy New Year and, second, to convey some of the many lessons we learned as we plan for a new market environment.   

With regard to some of last year’s events, we reiterate that many of the actions of the Fed and the Treasury are beginning to have their desired effect.  We implore investors to give them time to work!  The Fed’s initial policy measures were directed at unclogging the short term interbank lending markets.  Now that those markets are functioning better, the Fed’s new innovative programs signal a commitment to improving credit conditions for all other sectors and industries.  The Fed has acted incrementally, and this has facilitated a healing process.  Further, both the Fed and the Treasury have committed to provide additional measures, as necessary, to stabilize the economy.  Eventually, the cost of capital will be substantially reduced, and capital will flow more freely between lenders and borrowers.  We are encouraged by this prospect for 2009.

That said, we fully anticipate that the economic news will worsen before improving.  At issue for investors is whether all the bad news and the bleak outlook have been fully discounted by the markets.  The outcome of that debate will have great influence over returns this year.  We are, however, sure of one thing:  there should not be a repeat of the intense, shocking developments that gripped the markets for much of 2008.  We further acknowledge there will likely be more disappointments, but we anticipate they will be isolated and less systemic.

The markets will function differently going forward, especially since there will be less leverage.  For a while, governments will serve as the engines of economic growth.  We eagerly await much needed regulatory reform.  Investors also look forward to a massive fiscal stimulus plan directed toward improving our nation’s infrastructure, as well as similar actions by other central banks.  Unfortunately, there is no immediate fix to many of our economy’s problems.  So, until recovery becomes apparent, we emphasize that investors remain focused on diversification and long term opportunities.  With regard to the latter, we highlight many sectors and asset classes – e.g., intermediate tax‐free municipals; investment grade corporate bonds; high quality dividend paying equities; certain commodities such as gold.  We appreciate that market uncertainty remains elevated; please do not hesitate to contact us.  We look forward to discussing our views with you.