ProVise Management Group, LLC, an SEC Registered Investment Advisor

SPECIAL PROVISE BULLET ©

(October 7, 2008)

Over the weekend, we began preparing an analysis of the Economic Stabilization and Recovery Act.  One of the first and perhaps the most important aspects of our analysis is that this is neither a “be-all” nor a “cure-all” for the American economy, and it is going to take time for the antidote to take effect.  It saddens us that politicians are more interested in getting re-elected than they are in addressing major concerns for our country.  As we were preparing these insights, European bankers and politicians were attempting to address the economic concerns within their countries and, unfortunately, they too, lacked the leadership needed to coordinate their efforts in any meaningful way.  As a result, as world markets opened on Monday, this lack of trust was manifested and caused markets around the world to decline and in some cases, like Russia and Brazil, literally crumble.  By the time American markets opened, the stage was set for a very volatile, painful, gut wrenching day.  The market opened down about 200 points and over the course of the day dropped approximately 800 points, before “recovering” in the late afternoon and finishing down 370 points on the Dow. 

We would like to be able to tell you that the volatility will abate soon, but such is not likely to be the case.  Although the ProVise professionals have met numerous times over the past few months and especially during the past few weeks, we met once again yesterday afternoon to talk about the current economic environment and discuss the findings of our research and the alternative courses of action.  It is going to take time for the latest Federal intervention to be reflected in the marketplace.  The market volatility reflects not only the ongoing credit crisis but the increasing realization that world economies are going to slow down significantly in the near term.  While declines in the market were expected, the severity and intensity of the declines were not.  Our current investment strategy is to focus on ensuring that our clients’ portfolios can meet the cash flow needs for the near term without disrupting the longer term growth/recovery prospects for the equity portions of the portfolios.  Rest assured that, during these difficult times, we are doing all that we can.  We understand that in such difficult times, there are those who want to change course, but panic selling has never ultimately been a prudent strategy.  Panic selling moves money from the weak hands to the strong hands.

For those in the accumulation phase, these current challenges will likely provide opportunities for the long-term growth of your portfolio.  Just this week we have learned that even some of the most conservative bond traders are looking to swoop in and purchase some of these toxic assets as a long-term investment, which is what they really are.  They realize that, with the intervention of the government, these assets have a good possibility of producing a significant return over time.  We are looking at many solid companies whose stock valuations have reached absurdly low levels, and where appropriate, these companies are likely to be added to portfolios of money managers across the country and around the world.  Fear is a powerful motivator.  But to a prudent long-term investor, capitalizing on the fear of others can produce some once in a lifetime opportunities.  It is not easy.  It sounds counter-intuitive, but now is the time to be accumulating assets, not selling them. 

For those at or near retirement, especially those currently receiving cash flows from their portfolio, we recognize that watching the equity side of the portfolio decline so quickly and by so much can be very uncomfortable.  In fact, “nightmarish” might not be a strong enough description of how some are feeling right now.  Within our investment policy decisions, times like this were anticipated, even though we hoped they would never occur.  While each of you has different amounts of cash and fixed income investments in your portfolios, the portfolios are designed to have sufficient means to continue your regular cash flow distributions without having to sell equities at an inopportune time.  This allows the time needed in order to give the markets around the world a chance to stabilize and reestablish themselves. 

Over the past five or six years, the dollar has been hammered by other currencies, and in some cases in a very manipulative manner.  Ironically, those markets that fell the farthest recently are generally those which attempted to take advantage of the United States during that period of time.  Where did all the money from those overseas markets go?  It flowed back into the safest currency on earth…to the dollar, which staged a strong rally.  Commodity prices are plummeting, which is a likely over-reaction to this short-term economic turmoil.  Nonetheless, this “flight to quality” will help the United States repair its economy more quickly than others around the world.  The most important part of capitalism is having capital. 

Many people have asked whether these events are “unprecedented”.  They are not.  The markets recovered within a two year period from the ’87 crash which saw a one-day decline in the major indexes of about 22%.   The last time we saw the deleveraging of investments to the extent we are seeing now, we would have to go back to the ‘30s.  Fortunately some lessons were learned.  At that time, investors could borrow 90¢ against every dollar of investment that they had, and most were leveraged heavily, including many small investors.  At that time, the Federal Reserve made a fatal mistake by taking money out of the economy rather than making the economy more liquid.  Under Ben Bernanke, that same mistake will not be made as his doctoral thesis was written about this very subject.  His leadership, both financially and morally, is deeply needed at this time, and we are lucky to have him.  The Fed has been taking aggressive action to inject liquidity.  While our unemployment rate is over 6%, it is nowhere near the 25% level it was during the Depression. 

Life runs through cycles and we are in a crazy cycle at the moment.  Capitalism can create more wealth for more people than any other economic system known up to this point.  But, capitalism requires that everyone play by the same rules.  When companies like Countrywide Mortgage play by one set of rules (loose, if they existed at all), and Wells Fargo plays by a different set of rules, (disciplined and long-term), we see the disintermediation like we see in these two companies today.  In the end, America will get it right.  We will be better.  We will have a stronger economy. 

All of us at ProVise are working extra hours and doing the things we can to prepare to take advantage of the eventual recovery that we expect.  None of us like to see our balance sheets decline, but decisions made in a panic are typically bad ones and can do significant damage to long-term results.  We encourage you to avoid emotional decision making, and we are here to help in any way we can. 

As always, we encourage you to give us a call if you would like to discuss anything further.  We will visit again soon.

RAY, KIM, ERIC, BRUCE, and LOU

©10/07/08 ProVise Management Group, LLC

This material represents an assessment of the market and economic environment at a specific point in time.  Due to various factors, including changing market conditions, the contents may no longer be reflective of current opinions or positions.  It is not intended to be a forecast of future events, or a guarantee of future results.  Forward looking statements are subject to certain risks and uncertainties.  Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in these Bullets, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any discussion or information contained in these Bullets serves as the receipt of, or as a substitute for, personalized investment advice from ProVise.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Information is based on data gathered from what we believe are reliable sources.  The information contained herein is not guaranteed by Provise Management Group, LLC as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.  The indices mentioned are unmanaged and cannot be directly invested into. .  If you do not want to receive the ProVise Bullets, please contact us at:  info@provise.com or call:  (727) 441-9022.  Please visit our Web Site at:  www.provise.com.

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