Market Report

Since 1986

R. W. Rogé & Company, Inc. Private Wealth Management 630 Johnson Avenue, Suite 103, Bohemia, NY 11716-2618 Telephone (631) 218-0077    Fax (631) 218-0147   E-mail: info@rwroge.com Web-site: www.rwroge.com

September 18, 2008

Ladies and Gentleman,

It's been a very tough year for the markets around the world.  Last week and earlier this week it got ugly with the bankruptcy of Lehman Brothers and the takeover of Merrill Lynch by the Bank of America and now the government rescue of AIG.

Charles Schwab and TD Ameritrade Financial Stability

We received a number of phone calls the past few days about the financial stability of Charles Schwab and TD Ameritrade who we use to custody client accounts.  I am pleased to report that they are both in fine shape, as they are not investment banks.   Investment banks create products and sell them to institutions such as insurance companies, pension plans and banks.  In addition, your accounts are separately held and each account has both SIPC and supplemental insurance far in excess of the account's value. If you need more information about SIPC and the supplemental insurance please review our August 2008 e-mail on our web-site by clicking on the following link:

http://www.rwroge.com/roge_reports/issue23_0808A.html

The investment banking operations of Bear Stearns, Citibank, Bank of America, JP Morgan Chase, Lehman Brothers, Merrill Lynch and others created and sold derivative products and provided the facilities and funding for excess leverage to be used in conjunction with these derivatives.  These derivatives, combined with leverage are now called toxic waste.  It is this toxic waste, sold by these firms that caused the sub-prime debt crisis on Wall Street and by extension the credit crisis on Main Street.  The executives of these companies made huge amounts of money for themselves and their top employees selling this toxic waste to insurance companies and pension plans.  Now they are asking the government (you and me the taxpayers) to bail them out because the house of cards they built collapsed.  The collapse happened because of the lack of management oversight in three areas: (1) Appropriate risk control and monitoring. (2) They did not understand what they were buying.  That's because these products were too complex for even very smart people to understand. (3) The excess use of leverage to magnify the profits they were making on these products.

Our Portfolio Strategy

The next question that's probably on your mind is what are we doing?

First we need to differentiate between normal market corrections and the one like we are going through now that is caused by the lack of confidence in the financial system. 

A normal market correction occurs every three to seven years because of the normal business cycle.  This is not a normal business correction due to the business cycle.  It is a market correction due to the lack of confidence.  No one knows how to value the toxic waste that is on the balance sheets of companies in the financial services sector.  So, to use an analogy, when the tide goes out, all ships sink to the same level.  Those that panic throw the babies out with the bath water, as the saying goes. This is how you identify a correction caused by a lack of confidence.  It creates a massive revaluation of assets and opportunities.  It allows value investors like us to pick up the babies that have been thrown out with the bath water.

We have been through corrections similar to this before.  In every case we did not panic and when the turnaround happened, it happened over a very short period of time.  It made us whole and returned our portfolios to profitability, which was more than satisfactory.  As evidence of this one only needs to look at the performance chart below and see how relatively well our portfolios held up during the three bear market of 2000 to 2002 and how well they recovered in 2003, 2004, 2005, 2006 and 2007.  The following chart is from our July 2008 newsletter, The Rogé Report.

Model Portfolio Performance

(Net of Fees)

Period Ending 06/30/08

Notes:  The annual Model Portfolio Performance figures include model advisory and brokerage fees including a 1.0% advisory fee charged by R.W.Roge & Company, Inc ® and a 0.11% brokerage transaction fee paid by RWR's actual clients during 2005.  Wealthbridge Models are net of our 1.25% management fee on the non-Roge Partners Fund portion of the portfolio and include a 0.11% average brokerage transaction fee paid by RWR's actual clients during 2005. (*) Annualized since inception 10/1/01. 1 Indices are gross of fees. 

We also have many rules we follow when constructing client portfolios that help us create lower risk portfolios that emerge in much better shape from panic driven corrections like the one we are now experiencing.

Portfolio Rules

The first rule is that every one of our clients has an asset allocation of stocks, bonds and cash.  None of our clients have a 100% stock portfolio.

The second rule is diversification.  Within each of those asset classes we diversify.  We do this by manager style, sector and company size as well as domestically and internationally.

The third rule is that we invest only after we have done our due diligence and understand what we are buying.  The ResearchEdge® process we have developed over the past 22 years has helped us avoid exposure the Enron, Tyco, the accounting scandals,  the mutual fund industry scandal and other serious events that occurred over that period of time.

The fourth rule is that we re-balance our portfolios so that they don't go out of balance and take on too much risk in one asset class.

These rules are helping us now because many of the value funds we use in our portfolios' are sitting on substantial amounts of cash waiting for values to re-appear. In addition, we have been slowly migrating out of our hedge (Prudent Bear Fund) and some bond funds and most of the proceeds from those sales remain in cash, raising our cash allocation to over-weight.  We don't engage in rapid trading but gradually over-weight and underweight categories as they become overvalued or undervalued.

You will also notice that we are now selling certain positions that are at a loss to off-set gains from those positions that we have lightened up on recently.  These are funds that made substantial gains from their commodity exposure.  This will continue through the end of the year as we manage the tax liabilities of our portfolios.

Outlook

While no one knows for sure how long this will last and how much financial damage has been done to the financial system, I do believe that we are lucky to have Hank Paulson at the Treasury and Ben Bernanke at the Federal Reserve.  Paulson, the former chairman of Goldman Sachs does understand the complexity of the financial system and how to structure deals.  Letting a smaller company like Lehman fail but providing liquidity to AIG, a huge company at the center of the complex financial system was a smart thing to do.  We can't paint all of these firms with the same brush stroke.  Their importance in the system needs to be determined so that the banks on Main Street can resume raising capital and make loans so we can get back to a more normal business cycle.

You will notice that we talked about Uncle Sam leveraging up it's balance sheet to break the paradox.  Well this is precisely what Uncle Sam is doing this week with the AIG rescue.

I believe we are much closer to a bottom now that we are getting these big down days in market action.  I was watching world events on Sunday night from my hotel room in Toronto.  I thought there was the potential for a 1000 point drop for the Dow on Monday.  I figured this would be the market panic event we needed to complete the bottoming process of the market.  Well we had a 500 point day on Monday then up 200 and today down 400.  So, maybe this is beginning the bottoming process for the market.  No one really knows, but it surely feels like it to me.  We will probably have a few negative quarters for the economy (GDP) as a result of this.  The market will anticipate a recovery in the economy and will begin rebounding about six months before the economy begins growing again.  That could be as early as year end.  We also need to get past the election. No matter who is elected, both the president and congress will have to deal with the real problems of the economy and not their agenda for election.

We want to reassure you that we are carefully watching these events as they are unfolding.  There is nothing more important to us than the productive use of your portfolios assets.  We continue to follow our rules for investing which have helped us navigate through rough and turbulent markets before.  I am confident they will; with hindsight, prove to be helpful again. We also understand that some of you may be losing sleep with these events.  If that's the case, please call us to review your plan and portfolio.

On behalf of everyone here at R. W. Rogé & Company, Inc. we thank you for the confidence and trust you have placed in us over the years.  Our promise to you is that we will remain diligent by carefully watching events as they unfold and creating lower than market risk portfolio strategies that will eventually make our portfolios more prosperous for the long run.

Sincerely yours,

Ronald W. Rogé, MS, CFP®

Chairman & CEO

Disclosure: R. W. Rogé & Company does not intend to provide investment advice through this reprint and does not represent that the securities, indices or investment strategies discussed are suitable for any investor.  Investors are advised not to rely on any information contained in these articles in the process of making a fully informed investment decision.  News, views, opinions, recommendations and other information obtained from sources outside of R. W. Rogé & Company, Inc., are believed to be reliable, but we cannot guarantee the accuracy or completeness of such information.

(c) R.W. Roge & Co.

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