As we enter the New Year 2010 and commence our 29th year of business, we extend to you our sincere wishes for the best of health, safe journeys, and every Blessing of happiness and peace.

Here is the bottom line. Our clients are up more than + 40% over the past decade, while the S&P 500 Index is down nearly -10% for the same ten years.
(cumulative total, dividends included, gross of fees)

We made the bold and prudent decision to exit the equity markets in late 1999. Since then, we have safeguarded our clients’ assets in United States Treasury Obligations with varying maturities, and have preserved their capital against both the visible turmoil in the equity markets and the invisible deterioration of value caused by compounded inflation. Not for naught has the preceding decade been termed the “Naughties”: those investors who passively indexed have naught to show for their decision, while other investors have been wiped out by the naughty deeds of people now serving criminal sentences in jail.

It was easy to lose money and esteem over the past ten years. Those who lost conviction and those who lost patience were susceptible to speculators and get-rich-quick schemes. Winners, on the other hand, stayed focused on fundamentals and economic reality. Many people can boast about making money in an up market, but few professionals know when and how to safeguard money in a down market. It may not be very glamorous to say “I’m in cash”, but it is certainly a great relief to securely be in cash well before the equity markets implode.

We have preserved assets in down markets. What awaits is the opportunity to invest that cash.

Over the past year, speculation, the infusion of stimulus money, a depreciating Dollar, and the collapse in real estate values contributed to soaring stock prices through the end of 2009. Some investors wiped their proverbial brows as the 2009 rise in stock values partially offset some of their painful losses. Had it not been for the most recent rally, though, the return on stocks for the decade would have been much worse. It is important to recognize which factors did NOT contribute to the rise in the stock market: high unemployment, high rates of bankruptcy and insolvency, high levels of debt, and high taxes. Given these persistent and debilitating elements in the economy, many prudent investors have questioned how stock prices could rise so high and be sustained for so long.

Historically, the only movement which is faster than an ascent in the stock market is the descent, and as economic reality takes hold, this speculative bubble in prices could deflate rapidly. In the upcoming year, we anticipate neither a “V” nor “W” shaped correction in the markets. Instead, we expect something which looks more like a jagged lightening bolt. Should investors panic, as they often do in the face of economic crises, the issue of liquidity will come to the forefront. The absence of liquidity (that is, ready cash) during such panic could force investors to sell their stocks at a substantial loss against perceived value. Stock prices, in turn, could plunge to new lows as buyers are either unable or unwilling to step into a free-fall in the market.

We are well positioned in highly liquid cash equivalents, so we may begin to invest in the markets as equity prices adjust downward.

As confirmation of our decision to enter the stock market, we would like to see evidence of critical components to complement our long-term strategy. First, after years of internal hard work in many businesses, we would like to see a resumption of corporate profitability, reflecting improved margins and better managed finances. Second, after years of insolvencies and bankruptcies, we would like to see a resurgence in both industrial and personal consumer demand for goods and services. Over the past few years, businesses and households have been paring back their inventories, and the shelves and cupboards are looking rather bare at the moment. Any up-tick in demand should translate favourably into higher sales revenue for corporations. Third, after years of lay-offs and plant closures, we would like to see an impetus for companies to create jobs and hire workers. Favourable government tax policies for business development and employee benefits could foment a solid improvement in employment. All of these components should translate into a resumption of solid corporate earnings, which in turn, should provide solid returns on investments.

Tried and true disciplines are the hallmark of long-term investing. Meticulous financial analysis and methodical economic research are the cornerstones of the preservation of real assets. The key is to purchase the stock of well-managed and well-positioned companies when the price-to-earnings ratios reflect reasonable trading ranges. Not for naught do our clients consistently benefit from “Buy low, and sell high.”

George A. Leylegian
President and Chief Executive Officer