Been busy with a lot this week, especially watching Vice Presidential debates, and obviously the enormous financial crisis faced by this country. My bank, Wachovia, got swallowed up by my other bank, Wells Fargo. Some other news in the headlines:

Fannie Mae forgives loan for woman who shot herself

Bailout: Will it work?

House Passes Rescue Bill Second Time Around

Plenty of Perks for Taxpayers, Savers in Senate Rescue Plan

“Historic” is not a word we use lightly, but it seems appropriate to describe what took place in the financial markets last week.

As you look at the box score below, it masks the volatility that took place in one of the wildest weeks in Wall Street history. When the dust settled, the broad S&P 500 index finished the week with a slight gain, but it took some pain to get there. Last Monday, the Dow Jones Industrial Average dropped 504 points, followed by a gain of 141, a loss of 449, a gain of 410 and it closed the week with another gain of 368 points. Whew!

By Wednesday of last week, the world financial system was teetering on the brink of collapse. Credit markets had frozen, banks were unwilling to lend to each other and stock markets were plunging. A vicious death spiral was spinning out of control. After trying a “plug the hole” policy that had failed to stem the crisis, the U.S. government threw out the playbook and decided it was time to act decisively. By late last week, the government marshaled all its resources and created a plan to try to put the crisis behind us for good. The stock market liked what it was hearing and it staged a huge rally the last two days of the week. Let’s hope it continues.

THE PAST, THE PRESENT, AND THE FUTURE
OF THE CURRENT FINANCIAL SITUATION

In light of the recent turmoil, this week’s report will be longer than usual. We thought it would make sense to discuss the past, present, and future of the current financial situation. This may help put things in context for you.

The Past

In order to understand how we can get out of this mess, it’s necessary to figure out how we got into it. The late 1990s is a good place to start.

No doubt you remember those “good ol’ days.” The internet was changing the world, technology stocks were soaring, and the economy was humming along. It was a great time to be in the stock market as the S&P 500 index rose 220% for the five years ending December 31, 1999, according to data from Yahoo! Finance. That’s an average annualized return of 26% excluding reinvested dividends, which is simply phenomenal.

Of course, the good times didn’t last. The bubble popped and the S&P 500 declined by 49% between March 2000 and October 2002, according to data from Bespoke Investment Group. In order to limit the collateral damage to the economy from this steep decline, the Federal Reserve, under former chairman Alan Greenspan, embarked on a major interest rate cutting campaign to try and stimulate the economy. The Fed took the federal funds rate from 6.5% in May 2000 all the way down to 1% by June 2003, according to data from the Federal Reserve Bank of New York.

This precipitous decline in interest rates set the stage for the next bubble - real estate.

While the politicians fiddled, Wall Street and Main Street burned.

The financial markets eagerly awaited confirmation of a government bailout last week, but all they got by last Friday was partisan bickering and finger pointing. With no deal, traders pulled in their horns and the markets fell for the week.

It also didn’t help that last week’s economic news was mostly bleak. Here are a few of the highlights:

• The four-week average of first-time claims for unemployment insurance rose to 462,500 last week. That’s the highest since November 2001, according to MarketWatch. On the positive side, some of the spike was caused by Hurricanes Gustav and Ike as opposed to economic weakness.
• Second quarter GDP was revised down to 2.8% growth from a preliminary 3.3% rate, according to the Commerce Department. Over the past 12 months, GDP grew 2.1%, which is below the 2.75% growth rate most economists say is the economy’s long-run potential, according to MarketWatch.
• New home sales fell to a 17-year low in August, according to data from the Commerce Department. The August rate was also 34.5% below the sales number a year ago. These weak numbers are not too surprising since weakness in housing is at the root of our current financial problem.
• Orders for durable goods in August dropped a larger than expected 4.5% as demand declined in most major categories, according to data from the Commerce Department.

Now, for what we hope is some good news. Over the weekend, Washington lawmakers got serious and announced they had reached a bipartisan $700 billion agreement to bailout the financial sector. The agreement may prevent a “worst-case scenario” from unfolding in our financial markets, but it probably won’t forestall further economic weakness. As we’ve said before, it took us years to get into this mess and it could take us years to get out of it. In the meantime, we continue to work hard at preserving capital and searching for new opportunities.

THE CURRENT GLOBAL FINANCIAL MESS is a good reminder that it may pay to follow a few basic principles of good living. As a society, we’re inundated with messages that encourage us to spend, spend, spend, and buy stuff that might make us feel good in the short term, but in the long term could leave us with a migraine. For some people, the lure of easy credit and living the high life was hard to resist and they ended up getting in over their heads. By forgetting basic personal finance and life principles, some of these folks are unfortunately paying a heavy price.

As we survey the landscape, there are plenty of people and organizations who can share the blame for the situation our country finds itself in. Greedy financial institutions, hedge funds, investment banks, mortgage brokers, politicians protecting their jobs, ratings agencies, and regulators are just a few in a long list of culprits. But, at the end of the day, laying blame on other people won’t solve the problem or prevent the next one. Ultimately, we each have to be responsible for our own actions and do the best we can to make prudent decisions that protect our hard-earned assets. Here are a few basic principles that can benefit all of us:

• Live below your means. Consider saving at least 10% of your annual income. Before long, you’ll have a nice cushion that will help soften the blow if the unexpected happens.

• Buy adequate insurance. There’s no need to expose yourself to a major loss if you can insure the potential loss for a relatively small amount.

• Invest regularly. No one can predict whether the market will go up or down tomorrow, let alone next year. By investing regularly, you establish a discipline that may help smooth out some of the fluctuations.

• Don’t stress out over things you can’t control. We can’t control if there will be a thunderstorm tomorrow any more than we can control whether or not the $700 billion bailout package will be successful. What we can do though, is be proactive in preparing ourselves for whatever outcome may occur.

• Focus on what’s most important in life. We’re all given a certain amount of time on this earth and it’s in our best interest to use that time wisely. Spending time with your family, your friends, and helping others may help you stay sane in a sometimes crazy world.

Weekly Focus - From $12,000 to $30 Million in 68 Years

In 1940, surrealist artist Enrico Donati purchased a Picasso painting for a reported $12,000. Earlier this year, Donati died at age 99 and his estate is putting the painting up for auction later this year. Sotheby’s estimates the painting will fetch $30 million. What do you think is the average annual rate of return if the painting, purchased for $12,000 in 1940, sells for $30 million later this year? Would you believe about 12.2%? That’s a good example of the power of compounding!

“Historic” is not a word we use lightly, but it seems appropriate to describe what took place in the financial markets last week.

As you look at the box score below, it masks the volatility that took place in one of the wildest weeks in Wall Street history. When the dust settled, the broad S&P 500 index finished the week with a slight gain, but it took some pain to get there. Last Monday, the Dow Jones Industrial Average dropped 504 points, followed by a gain of 141, a loss of 449, a gain of 410 and it closed the week with another gain of 368 points. Whew!

By Wednesday of last week, the world financial system was teetering on the brink of collapse. Credit markets had frozen, banks were unwilling to lend to each other and stock markets were plunging. A vicious death spiral was spinning out of control. After trying a “plug the hole” policy that had failed to stem the crisis, the U.S. government threw out the playbook and decided it was time to act decisively. By late last week, the government marshaled all its resources and created a plan to try to put the crisis behind us for good. The stock market liked what it was hearing and it staged a huge rally the last two days of the week. Let’s hope it continues.

THE PAST, THE PRESENT, AND THE FUTURE
OF THE CURRENT FINANCIAL SITUATION

In light of the recent turmoil, this week’s report will be longer than usual. We thought it would make sense to discuss the past, present, and future of the current financial situation. This may help put things in context for you.

The Past

In order to understand how we can get out of this mess, it’s necessary to figure out how we got into it. The late 1990s is a good place to start.

No doubt you remember those “good ol’ days.” The internet was changing the world, technology stocks were soaring, and the economy was humming along. It was a great time to be in the stock market as the S&P 500 index rose 220% for the five years ending December 31, 1999, according to data from Yahoo! Finance. That’s an average annualized return of 26% excluding reinvested dividends, which is simply phenomenal.

Of course, the good times didn’t last. The bubble popped and the S&P 500 declined by 49% between March 2000 and October 2002, according to data from Bespoke Investment Group. In order to limit the collateral damage to the economy from this steep decline, the Federal Reserve, under former chairman Alan Greenspan, embarked on a major interest rate cutting campaign to try and stimulate the economy. The Fed took the federal funds rate from 6.5% in May 2000 all the way down to 1% by June 2003, according to data from the Federal Reserve Bank of New York.

This precipitous decline in interest rates set the stage for the next bubble - real estate.

With interest rates super low and the stock market in a funk, investors turned their attention to the previously moribund real estate market. As the economy gradually improved, people started to buy homes again in a big way. And banks, mortgage companies, and Wall Street wizards were more than happy to come up with new fangled ways of getting Americans into the home of their dreams with little to no money down.

Wall Street investment banks were thrilled with this new opportunity in real estate because they weren’t making much money on their traditional business of investment banking and buying and selling securities. By coming up with new ways to package, slice, and dice mortgage securities, Wall Street firms made a boatload of money. Unfortunately, many of these new securities, which provided capital to finance the real estate boom, were highly financed themselves. Effectively, the actual equity that underpinned some of these mortgages was negligible.

When the real estate bubble became unsustainable, just like the earlier technology bubble, it all came crashing down.

With very little equity supporting billions in outstanding mortgages, a slight decline in the value of the real estate caused a ripple effect of delinquencies and defaults. As the defaults spread, it began to feed on itself like a California wildfire inhaling dry timber. Eventually, fear took over as nobody knew when the vicious cycle would be broken. Enter last week.

Investors had weathered blowups from Countrywide, Bear Stearns, Fannie Mae, Freddie Mac, and now, they were facing major problems with Lehman Brothers, AIG, and Merrill Lynch. By week’s end, Lehman had been forced into bankruptcy, AIG had been effectively nationalized by the government, and Merrill Lynch had taken refuge in the arms of Bank of America. This tumultuous turn of events propelled the government to act swiftly and decisively.

The Present

The situation is fluid and changes are happening with lightning speed. Over the weekend, the Bush Administration sent to Congress a $700 billion proposal that would give the Treasury broad authority to purchase distressed assets from U.S. financial institutions in an effort to stem the crisis. The proposal would also raise the nation’s debt ceiling to $11.315 trillion from its current $10.615 trillion limit, according to Bloomberg. To put $700 billion in perspective, that translates into an average bill of $6,500 per U.S. family, according to a report from MarketWatch. Now, it’s possible that the Treasury will turn around and sell the assets and recoup some or all of that $700 billion, but that will not be known for perhaps years.

We also don’t know how hard of a bargain the government will drive when it tries to buy these distressed assets. If it tries to buy the assets at a very low price, then the financial institutions may have to take more write-downs and raise more capital, which could keep this vicious cycle spiraling down. Conversely, if it buys the assets at a high price, then the financial institutions benefit at the expense of the taxpayers who are on the hook for any future losses.

In a surprising twist, investment banks Goldman Sachs and Morgan Stanley announced late Sunday night that they will convert their businesses into traditional bank holding companies, according to The Wall Street Journal. This will subject the companies to new regulatory oversight and possibly significantly reduce their future profit opportunities. It may also put the companies in a better position to be acquired, to merge, or to acquire a smaller bank with insured deposits.

In other news last week, the Treasury announced that it is extending bank deposit-type insurance to money market funds. The news of a money market fund that “broke the buck” prompted the government to implement this safety net as a way to limit further damage in the $3.3 trillion money market industry, according to Bloomberg. Also, on Friday, the Securities and Exchange Commission implemented a ban on short-selling 799 companies through October 2. This may ease some of the pressure on these companies and shield them from “bear raids” that could depress their stock price.

The changes announced by the government late last week helped spark a huge rally in stocks on Thursday and Friday. Nobody knows whether this is just a temporary reprieve or the beginning of a new period of stability. What we can say with some confidence is the government is all over this situation and they are trying to do all they can to prevent a replay of the 1930s.

The Future
As the old saying goes, “Forecasting is the art of saying what will happen, and then explaining why it didn’t.” At the risk of having to explain ourselves later, we’ll offer some comments about what the future may hold.

First, capitalism as we know it may have changed dramatically. The concept of letting free markets adjust and self-correct with minimal government intervention is likely gone. The government’s actions over the past few months indicate that there are limits to laissez faire. We may see more government regulation and that may mean lower long-term returns from securities because the regulations could remove some of the risks from investing.

Second, when a financial calamity is knocking on the door, a small number of people may assume tremendous power to make decisions that put hundreds of billions of taxpayer dollars at risk. Right now, Treasury Secretary Hank Paulson is arguably the most powerful person in America. He and his coterie of trusted advisors are massively reshaping our financial system with bullet train speed and little oversight. When the history books are written, Paulson may go down as the greatest Treasury secretary of all time or we may be throwing darts at his picture. Time will tell.

Third, we live in a global society that is highly connected through commerce and instantaneous communication. What happens in the U.S. is no longer a U.S. issue and vice versa. As a global society, we may all sink or swim together - so we all better get along. The financial crisis we’re experiencing is a great example. It’s not just isolated to the U.S. It has global ramifications.

In Closing

As we wrap up this extended commentary, we need to keep in mind that it took us years to get into this mess and it may take us years to get out of it. The government’s unprecedented action last week may have stopped the bleeding, but that doesn’t necessarily mean the patient is well. We still have a glut of homes on the market, a relatively soft economy, and a host of other headwinds. With that said, new opportunities may arise and we are always on the lookout for them.

No matter what the market may throw at us, we want you to know that we are closely following the situation and we are doing all we can as professional advisors to be good stewards of your money. If you have any questions, please let us know. Thank you for the trust and confidence you’ve placed in us. We’ve worked hard to develop it and we are working hard to keep it.

Weekly Focus - Think About It

“God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.”
– Reinhold Niebuhr

Earlier this year, some investors thought the key to a rising stock market was to see a big drop in the price of oil. Well, we’ve now seen a 27% drop in the price of oil since its July 3 closing high, but, as of last Friday, stock prices were still languishing near their July lows, according to Associated Press. So, what’s the deal?

The deal is investors can be fickle. They’re prone to quickly changing their minds based on which way the wind is blowing. Oil is a good example. Here’s a brief chronology of investors’ fickleness toward oil:

•For the first few months of 2008, we kept hearing about how strong economic growth in China, India, Brazil, and other emerging economies was pushing up the price of oil and that it wasn’t a bubble, rather, it was a simple case of supply and demand.

•During that same time, the U.S. stock market weakened as investors fretted that higher energy prices would ignite rampant inflation and tip the U.S. into a recession.

•As oil prices rose to $145 per barrel in July and the U.S. stock market entered a bear market, economic pundits started suggesting that if oil prices would drop significantly, that would be the spark necessary to jumpstart our economy and fire up the stock market.

•As if on cue, by Friday, September 5, oil prices ended the day down 27% from their July 3 high, while the Dow Jones Industrial Average was up only 2% during that same period, according to data from Yahoo! Finance.

•Now, some market pundits are saying that falling oil prices are due to weakening demand from faltering global economies, according to Associated Press. That could be bad news for our stock market because strong exports have been one bright spot in corporate earnings. If export demand weakens, that could translate into lower corporate profits and lower stock prices.

That sure makes a neat and tidy narrative, doesn’t it? Wall Street talking heads love to take the complexities of investing and turn them into short stories that can be easily understood. We’re all in favor of a good story well told, but when it comes to investing, we prefer non-fiction to fiction. Part of our job as stewards of your money is to try to separate the fictional stories from the non-fictional. And, when the story changes frequently - like it has recently - we become especially alert.

DO FINANCIAL MARKETS EFFICIENTLY AND EFFECTIVELY reflect all available relevant information? Some academicians believe that you cannot “beat” the stock market. They believe that the market is smarter than any one individual and that stocks always trade at their fair value. As such, they suggest it is not possible-over a long period of time-for an investor to outperform a broad-based stock index. They call this the “efficient market hypothesis.”

Critics of the hypothesis point to super investors like Peter Lynch and Warren Buffett who have long-term track records that show they’ve outperformed the market. Academics don’t dispute that some people have beat the market, but the academics chalk that up to luck and statistical anomalies. They also point out that it is near impossible to identify ahead of time the next Peter Lynch or Warren Buffett, so, most people can’t benefit from those few outliers.

Putting the debate aside for a moment, in the investing world, there appears to be three camps. There’s the “If you can’t beat’em, join’em” camp that says markets are efficient and you might as well just invest in products designed to mimic broad market averages. These folks tend to focus on making an appropriate allocation to various asset classes. The second group says, “Yes, I can beat’em.” They think discipline and research may lead to superior market returns. Then there’s a third group that is in the “A little of both” camp. They think the other two sides have merit and it makes sense to manage portfolios using both passive and active strategies.

So, which camp is right? Like many things in investing, it’s not always black and white. Reasonable people could make a case for each of these three strategies. And, at any given time, one strategy might work better than the other. Understanding that may make all of us better investors.

Weekly Focus - Key to Health and Happiness

Various researchers have concluded that one key to health and happiness is to actively try to become more grateful in our everyday lives, according to an article in Great Good magazine. Here are four steps we can all take toward that end:

1. Write a letter of gratitude to someone you’ve never properly thanked and deliver it in person.
2. Keep a gratitude journal of everything for which you’re grateful.
3. Savor life’s little joys that come your way.
4. Think out of the box and thank people that you might not ordinarily thank.

Give these ideas a try and see if your life improves!

You read right. Fannie Mae and Freddie Mac were seized by the government today, the goal being to rectifying the disaster that’s taken place over the last year in the housing and mortgage debacle. Treasury Secretary Henry Paulson, and the Director of the Office of Federal Housing Enterprise, James Lockhart, laid out a plan that would put the two mortgage mammoths into a conservatorship that will be overseen by the Federal Housing Finance Agency.

According to Paulson, all options were put on the table, and the best solution that would meet all objectives (market stability, mortgage availability, and taxpayer protection) was the takeover of Fannie Mae and Freddie Mac.

The regulatory agencies in charge of the plan gave walking papers to the CEOs of Fannie Mae (Daniel Mudd) and Freddie Mac (Richard Syron). Herb Allison, chairman of TIAA-CREF (where I myself have some retirement money sitting somewhere in cyberspace), will take over at Fannie Mae, while David Moffett, formerly a CFO of U.S. Bancorp and senior advisor at private-equity firm the Carlyle Group, will take the reigns at Freddie Mac.

Whether or not these two veterans of the industry will be able to make a big enough difference to help this dismal market remains to be seen. But Fannie and Freddie are pretty much the only place banks and home lenders are able to go in this market to continue making loans. Without Freddie and Fannie continuing to supply that lifeline, the whole housing market could sink to the bottom of the ocean.

Only time will tell if this move by the government is going to be enough to make a difference and sustain the housing market in the months and years to come–and at the billions of dollars to the U.S. that the rescue plan is going to cost. The problem lay in the unpredictability of the future of the housing market, including where home prices go and the level of mortgage rate defaults, as well as the stability in the financial institutions that own large portions of Fannie and Freddie.

As we wrapped up the traditional end of summer last week, buyers and sellers were scarce on Wall Street.

For the first three trading sessions last week, volume on the New York Stock Exchange was the lowest of the year, according to Briefing.com. Apparently, investors decided it was time to relax a bit. Unfortunately, for those investors who did stick around, it was a bumpy ride. The market experienced three days when the Dow Jones Industrial Average rose or fell more than 100 points, according to Barron’s. Two of those instances were negative.

Despite the lack of trading volume, there was no shortage of market-moving news. On Monday, the Dow dropped more than 200 points on renewed credit crunch jitters, according to The Wall Street Journal. On Thursday, the Commerce Department released revised GDP numbers, which showed that the economy grew a solid 3.3% in the second quarter, up sharply from the original estimate of 1.9%. That positive news helped spark a more than 200-point gain in the Dow, according to MarketWatch. And, then on Friday, weak personal income numbers and a downbeat earnings report from Dell Computer contributed to a 171 point loss in the Dow, according to MarketWatch. Of course, Hurricane Gustav didn’t help matters either.

The relatively light volume last week probably exaggerated the market swings. However, when the market moves sharply in different directions within the same week, it may be a sign that investors lack conviction. To investors who believe the market is simply efficiently reacting to new information, those swings are normal. Other investors look at the swings as further indication that this market is still trying to find direction and that it lacks conviction.

No matter which set of investors is right, the market seems stuck in a broad trading range. This yo-yo effect can be frustrating, but we understand that investing is not a sprint; it’s more like a marathon. And, we continue to do all we can to keep you prepared to go the distance.

BOILED DOWN TO ITS CORE, what is the simplest formula for making money in the stock market? Arguably, you could boil it down to “buy low, sell high.” Conceptually, it’s hard to argue with that cliché, but practically, it’s hard to act on it. But, what if we could add some “practicality” to the cliché? Would that improve our odds of being a successful investor? Let’s find out.

One of the most important questions we have to answer is, what is low and what is high? When it comes to investing, low and high are only discernable in hindsight. For example, back in May 1997, Amazon stock was selling for less than $2 per share on a split-adjusted basis, according to Yahoo! Finance. One year later, in May 1998, the stock was selling for more than $7 per share, split-adjusted. Now, one could argue that Amazon was “low” in May 1997 and “high” in May 1998 because the stock had more than tripled in one year. Would May 1998 have been a good time to sell Amazon?

If we fast-forward a bit and look at the following 11-month period from May 1998 to April 1999, the data shows that Amazon stock rose from a little more than $7 per share to more than $100 per share. So, what looked like a high price in May 1998 actually turned out to be a low price when viewed just 11 months later. The point is simply that “low” and “high” only become clear with the benefit of hindsight. However, sharp investors apply some other measures to help them discern what’s low and what’s high. Here are a couple examples.

In a December 14, 1996, article in Financial Times titled “Get Smart, and Make a Fortune,” super investor Jim Rogers discussed how learning to spot periods of extreme “conviction of certainty of all the participants” is one way to become a successful investor. By this he meant when you read in the media about “the new era” or your cab driver starts talking to you about stock tips, then you know that we may be near a top in the market. The same is true near the bottom of a market. When all you hear is doom and gloom and the magazines start heralding “The Death of Equities,” that may be a time to get in because the market may be near a low point.

Rogers went on to say, “It is learning to listen to the gloom and doom at bottoms and question it, and to the exultation at tops and question this as well, that makes a sharp investor.” In other words, he’s suggesting you be a contrarian and go against what the crowd is doing at times of either extreme exuberance or devastating despair. No doubt it is hard to go against the crowd, but that’s what many successful investors have done. Rogers ended his article by saying the smart investor, “Learns to buy fear and panic and to sell greed and hysteria.”

A second investor that you’re probably more familiar with is billionaire Warren Buffett. Adding more context to Rogers’ comments, Buffett said, “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” Buffett has no problem going against the crowd and when he does, it’s based on detailed analysis and sound reasoning. Frequently, he buys stocks that are somewhat out of favor (i.e., low in price, but high in potential value) and he reasons that eventually the crowd will come around to his point of view.

In another insightful comment, Buffett said, “An investor should act as though he had a lifetime decision card with just twenty punches on it.” His point was we have to be patient. Great investment opportunities don’t come around that often so, rather than swinging wildly at lots of pitches, we should wait for those times when the odds appear to be in our favor.

Both Rogers and Buffett understand the concept of buy low and sell high and they seem to be experts at understanding investor psychology and turning that knowledge into winning investments. They also seem to have enough patience to wait for the opportunities to arrive. As we look at the stock market today, it’s clearly down from its highs and there are many naysayers. Rogers and Buffett have successfully used these two ingredients to make winning investments in the past. And while no strategy can assure success or protect against loss, we continue to monitor opportunities and we’ll do our best to take advantage of them on your behalf.

Weekly Focus - Think About It

“In every walk with nature, one receives far more than he seeks.”
- John Muir

As you know, we’ve been in the market to buy a house for some time now–even made the move from drizzly, expensive Seattle to sunny Atlanta and, to us, the land of affordability. But we haven’t yet even made one offer on the beautiful homes we’ve been walking through each weekend, and we probably won’t. At least not in the next couple of months, anyway. And why not, you ask? Well, it’s pretty simple, actually, and apparently lots and lots of homebuyers are doing the same.

It’s a buyer’s market! (Read CNN’s article Homebuyers turn screws on desperate sellers).And because it’s a buyer’s market, and because it’s likely going to be a buyer’s market for some time yet, we’re just not in that big of a rush to shell out our hard-earned savings if we’re going to be able to purchase more house for the same amount in a couple of months, when sellers are even more desperate than they are right now.

Why am I so confident in this fact? Well, the truth of the matter is that homes keep popping up on the market down here, and listings that have been on the market for a little while continue dropping in price (just yesterday one of our ‘dream’ listings dropped by $4,000–not much, really, but a drop nonetheless, and likely a product of the price of the listing just a few doors down. And when I say ‘dream’ home, I mean ‘dream’ home. All upgraded kitchen, immaculate finishing, large yard, etc.

I feel almost hesitant to even mention where we are looking for homes, because there are so many of them out here that are in perfect condition that I almost feel like I would be letting the cat out of the bag. Obviously that’s not true, because it’s not like the homes are down some hidden path and not on the MLS system, but coming from a place where homes like this sell for more than double we’re literally speechless and in awe of what we can now afford. But there are homes for sale in our desired area located within just a few feet from other homes of equal beauty and value. It’s scary as a buyer to see so many homes for sale, because you start wondering why, exactly, all of these homes are for sale. Is something wrong with the neighborhood? Is something wrong with the construction of the homes? Or is Mary or Sarah or Betty really telling the truth when they say they’re relocating for a job? Or moving to a larger house? Or (insert whatever reason here). So we wait.

We wait until we see homes start selling. And we watch–watch what the homes sell for, and how long the gap between when a home is first listed and when it actually sells, is. Could we go put a down payment on a house right now, and afford it? Absolutely. But why do that just yet? Rather than haggle with the seller about paying our closing costs, or kicking in the new appliances, or paying for us to go to Cancun if we buy the house, I’d rather wait it out and have them offer it to us automatically. And do this all on top of a sales price that makes me feel comfortable that if home prices go down, I won’t be the one under water. It’s what is going to make me feel good about purchasing our home. And so, that’s what we’ll do. We’ll wait. And wait some more if we need to.

When Warren Buffett talks, people listen. Last Friday, the famed investor spent three hours talking to CNBC’s Becky Quick live from Omaha. Here are a few highlights from their conversation that are worth sharing.

When asked about the state of the economy Buffett said, “The country will be doing far better five years from now than it is now, but it won’t be, in my judgment, it probably won’t be doing better five months from now.” In other words, Buffett seems to be saying that we need to take a long view here and realize that it took us more than 12 months to get into our current predicament, so it may take more than 12 months to work our way out of it.

Buffett seems to think there’s value in equity markets around the world. In one of his more upbeat remarks, he said, “I see values in all arenas. I mean, we try to look for the best ones, but there’s no magic to any given market and things are cheaper than they were a year ago in markets here and in markets around the world. So, everything is more attractive, generally speaking, both here and in Germany, and the UK, and Korea, and you name it.”

So, what keeps Buffett up at night? What does he worry about? His answer is quite instructive.

“Well, I don’t worry that much in the sense that we’ve been through lots of recessions in the past, and that the country always comes out stronger, and so I expect, I expect stock markets to go down from time to time. I expect there to be uncovered, I expect that we will uncover credit mistakes. I expect that we’ll have recessions. But, I also expect, and I’m totally convinced, that your children will live better than you and your grandchildren will live better. So, I don’t, I don’t get upset about, day-to-day, what’s happening in the market. It may offer, in fact, it does offer chances to buy things more attractively. I mean, if I go to a supermarket and things are on sale, I feel better.”

Buffett’s optimistic words helped the stock market post a strong gain last Friday. However, weakness early in the week left the market slightly down for the week. As Buffett says above, the good thing about weak markets is they may create attractive investment opportunities. As your wealth advisor, we continue to do our best to find those attractive opportunities and turn them into financial success for you.

HOW WOULD YOU LIKE A JOB where you make nearly a million dollars a year yet your accuracy in your main job activity is less than 10%? It appears that such a job exists and it’s called “Wall Street Securities Analyst.”

Back in the heyday of securities analysts-the bubblelicious late 1990s/early 2000s-these stock stars pulled down average annual paychecks of $1.8 million, according to a March 2003 Fortune article. By 2003, the brutal bear market had taken its toll and the analysts’ pay was down to approximately $800,000 per year, according to that same article.

Analysts are paid to research companies and develop earnings estimates. These earnings estimates are used to help determine if a company’s stock is valued appropriately in the stock market. Money managers then use these estimates to help them make buy and sell decisions. You would think that these highly educated analysts (many of whom have MBAs, CFA designations, and come from prestigious schools) would be quite accurate in their estimates. Unfortunately, they frequently miss the mark by a wide margin.

An August 20, 2008, Bloomberg story spelled out in stark terms just how poorly analysts have fared lately. Bloomberg said, “Analysts correctly predicted results for 6.7% of the companies in the Standard & Poor’s 500 Index that released second-quarter earnings, the fewest since Bloomberg began tracking the data in 1992.” With less than 10% accuracy in predicting earnings, it’s no surprise that many investors have trouble “beating” the market. The analysts were particularly off the mark in forecasting earnings for banks, brokers, insurance companies, and retailers, according to Bloomberg.

This inaccuracy is not just a recent phenomenon either. David Dreman, in his 1982 book, The New Contrarian Investment Strategy, cites a 1977 study published in the journal Financial Management, which shows how poor analysts were in making forecasts back in 1972-1976. In the study, the researchers found that the average annual error for earnings estimates on 92 New York Stock Exchange listed companies between 1972 and 1976 was 24.1%. In other words, the actual earnings from these companies were about 24% different from what the analysts had projected.

As they say in the computer business, “garbage in, garbage out.” It’s no different in the investing world. When you work with poor data, it’s difficult to be a successful investor.

We try to be careful in distinguishing between data we think we can “trust” and data that we think is susceptible to “error.” Securities analysts provide good background information, but their earnings estimates are often not very reliable. We’ve learned that being somewhat of a skeptic and filtering information through our own lens tends to pay dividends.

Weekly Focus - Just Six Words

Can you summarize your life in just six words? A recent book titled, Not Quite What I Was Planning: Six-Word Memoirs by Writers Famous and Obscure, is filled with these short life stories. Here are several examples:

“Risked it all; wasn’t quite enough” by Greta Orris.
“Aging late bloomer yearns for do-over” by Sydney Zvara.
“Painful nerd kid, happy nerd adult” Linda Williamson.
“Extremely responsible, secretly longed for spontaneity” by Sabra Jennings.
“Too much suffering because of money” by Sam Norton.

It’s not easy to find just six words that encapsulate your life, but it’s a worthwhile exercise. Give it a try. We’d love to hear what your six words are!

While it’s dropped in recent weeks, it’s no secret that the price of oil is at record levels, jacking up how much you pay each week for a gallon of gas. And while it’s been likely a non-factor over the past few months in terms of how much you’re paying to keep your house warm (probably not a factor at all, considering how hot it’s been around the country), my advice would be not to get used to it.

The cost of heating oil is expected to jump up by about 30% during the next few months as we start turning on the heat at home–bad for us, but probably good for the natural gas companies, whose product is only expected to jump up some 22% on average around the country.

Who’s going to get hit the most? Well, if you live in the Northeast, probably you. Half of U.S. households already use natural gas, but a great majority of heating oil consumers are located in the Northeastern states. If that’s you, you may want to consider converting from oil to natural gas which, in the short-term may cost you between $3,000 and $7,000. But in the long-term, my friend, you’ll probably be happy you did convert. Check with your local providers, however, because depending on where you live, this may not even be an option.

There are benefits to natural gas, above and beyond the price, as well. Natural gas means less maintenance, and you can use it to cook, for your fireplace, and to heat water, amongst other possible uses. So look into it–you may save yourself some money and improve the efficiencies that oil just doesn’t handle.

The tug of war in the stock market ended in just about a draw last week as the Standard & Poor’s 500 index rose a fraction.

Since the beginning of the year, the S&P 500 index has traded in a range roughly between 1,215 and 1,450, according to data from Yahoo! Finance. However, when you consider the weakness this year in the financial and homebuilding sectors, the rise in oil prices and the inflation spurt, we might view it as a positive accomplishment that the market is only down about 12 percent year-to-date as measured by the S&P 500 index. When you dig deep into the market, there’s been significant turbulence in certain sectors (e.g. financials, homebuilders), but some of that weakness has been offset by strength in the transportation and commodities sectors, according to Morningstar.

Of late, a stronger dollar and declining oil prices have helped breathe life into the markets. As of last Friday, the dollar had appreciated for 11 straight days against the euro, according to Barrons. While you never know for sure what causes a run like that, some of the “experts” suggest it’s due to weakening international economies. So, while the U.S. economy may be weak, other countries are starting to slow and that may make the U.S. look a little better on a relative basis.

August is frequently a peak time for Wall Street titans to retreat to the Hamptons and other upscale locales to soak up some sun and relax. As a result, stock market volume has been relatively light this month so it’s hard to draw any conclusions from the recent market action. As we head into the fall and get another round of quarterly earnings, that may change. Stay tuned…

WHY DOES THE PRICE OF A STOCK FLUCTUATE? Theoretically, you could argue that stock prices are simply a function of supply and demand but that’s so broad that it’s not very useful in trying to determine the future direction of stocks. Over time, two main schools of stock analysis have developed-fundamental analysis and technical analysis. Fundamental analysts use financial data such as revenue and earnings to try and determine a company’s underlying value and potential for future growth. Technical analysts use charts based on market activity such as past prices and volume to try and identify the future direction of the stock. Devotees on each side vigorously defend their chosen method.

There’s also a third, but less understood method of stock analysis called cycle analysis. This school looks at things such as harmonics (don’t ask), Elliott Waves, Kondratieff Waves, Gann patterns, presidential cycles, 40-week cycles, 20-week cycles and yes, even astrological cycles. Cycle adherents are very quantitative and believe the markets are driven by mathematical patterns that are not readily observable. Of course, “cyclists” stand ready to discern these patterns for you for a fee.

So which school of analysis is the best? In reality, they all may have a place. The reason is, there are some market participants who believe in and invest based on these schools. If enough of them act at the same time, that ends up driving demand for a stock and could cause it to go up or down. Unfortunately, there’s no way to measure or predict the impact of any one school on the price of a stock or the market as a whole.

Over long periods of time, stock prices tend to reflect the underlying earnings of the company. If you can get the earnings right and figure it out before the “crowd” does, then you may have a winning strategy. Of course, that’s no easy task.

Weekly Focus - Mind Reading?

The U.S. Army awarded scientists a $4 million grant to study brain signals in an attempt to, “decipher what a person is thinking and to whom the person wants to direct the message,” according to an August 15 Associated Press story. Using brain wave-reading technology known as electroencephalography, or EEG, scientists had volunteers wear an electrode cap and then they asked the volunteers to think of a word chosen by the scientists. The scientists then analyzed the brain activity. In what may be a scary thought (pun intended), the scientists, “hope to develop thought-recognition software that would allow a computer to speak or type out a person’s thought,” according to the article. And now you know were our tax dollars go.