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First Quarter 2009 Quarterly Newsletter

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A Glimmer

After a miserable February and early March, wherein the markets made a sixth new low since it
peaked in October 2007, something interesting happened. The market actually went up. In fact, in
twelve trading days, it moved more than 20%. That is the S&P 500's greatest bounce in the shortest
time since 1938. Should we be excited, or leery, or just continue to hide under the bed? Perhaps a
bit of all three. During the last three weeks of March, there were also a few surprising news items
that got the market's attention. Among them were:

• Citigroup announces profit for the first two months of 2009.
• New and existing housing numbers positive for February.
• Retail sales and personal consumption reports suggest growth in 1st quarter '09.
• Rapid liquidation of February's business inventories reported.

Clearly, there was other economic news that was not so cheery, but the markets showed some
optimism with a quick upward response. So, is the worst over? Is the bottom in? Has the new bull
started? You already know that answer. We won't be certain for many more months.

As has been stated ad nauseum, in this report and elsewhere, recessionary bear market bottoms
occur four to nine months prior to the bottoming of the economy. That's why attempting to time the
bottom of a bear market by watching TV or reading the newspaper just won't work. Often we are
asked if there is a better method of dealing with bear markets. Would it be better to sell out of
equities, sit on the sidelines in cash, and jump back in when one is certain the bull market has
started, even if you miss the first several months of the new bull? Recent financial research shows
the futility of this technique.

Below is a chart which shows the average monthly compounded return for periods of time after the
market cycle has bottomed. A full market cycle is measured from peak to peak, starting in 1929.
There have been 16 such complete cycles since that time. The chart clearly shows that the first 3 to
6 months of the new bull market have dramatically higher returns than any other time frame in the
bull cycle.

For example, the average monthly return for the first 3 and 6 month periods of a new bull market are
5.7% and 4.0%. The average monthly return for the entire remainder of the bull market after those
initial 3 and six month periods are 1.8% and 2.0% respectively. This clearly shows that if you miss
being in the market for the first three and six months of the bull market, you miss the quickest and
easiest gains of that entire cycle. Because the bottom of the market cycle occurs earlier than the
bottom of the economy, there is no way to gauge the best time to jump back into the market.
Consequently, the only way to receive the attractive returns of the early stages of the up cycle is to
be there when it starts. That is why we advise our clients to hold their positions and not jump in and
out in an attempt to guess when the new bull market starts.

Damn Those Socialists!

Whether you get your information from Newsweek, Fox News, The New York Times or hundreds of
other sources, you have undoubtedly seen the term socialism used more in the past few months
than any time in recent memory. The term was not used in a "good" way. More than a few authors
and talking heads have started to compare the new administration's policies to other countries that
have a much greater tilt towards socialist tendencies. The end result of this new labeling appears to
be a fear that if this trend continues, our stock market, and consequently, investor portfolio
performance, would suffer greatly.

We thought it might be interesting to review some historical stock market data from other
industrialized countries and see how they compare with America's. Just how have the stock markets
performed in those countries that have: huge amounts of mandated vacation time, nationalized
healthcare, expensive cradle-to-grave social programs, dramatically higher income tax rates and
even permit legal prostitution and marijuana use?

DFA Inc. scanned the MSCI data of all industrialized countries (which includes Canada, all
Scandinavian and European countries, the UK, Hong Kong, Singapore, Australia and New
Zealand). Surprisingly, over the last 10 years, measured in US Dollar terms, America came in 20th
out of 23 countries on the list. In local currency terms, the US came in three spots better. But either
way, the US underperformed many countries whose governments had meaningfully more influence
on their country's business regulations. If you go back further and review the first data collection (18
countries started 39 years ago), you find that the US ranked 15th out of the 18 countries that have
reported data during all that time period.

Market returns in Sweden, Denmark, Netherlands, France, Spain and Canada (all clearly more
"socialist" than the US) and many more all topped the US. This seems to suggest that an
industrialized country's economic or social policies might not mean all that much to their market
returns. The moral of this story is that one should not assume that the degree of government
intervention should be the only yardstick used when determining expected stock returns. Investors
should absolutely not believe that a country's degree of "socialism" is the principle factor in
determining their portfolio's performance. You are, however, still allowed to dislike the French.

Money Can't Buy You Love

But it can get your name on a building. Last fall, David Booth, a University of Chicago - Graduate
School of Business alumnus, gave a $300 million dollar gift to his alma mater. It was the largest gift
in the school's history, and promptly led to a name change: The University of Chicago Booth School
of Business. We relate this piece of news because David was a co-founder of Dimensional Fund
Advisors Inc. (DFA Funds) in the late 1970's, and was instrumental in developing the unique asset
class funds that we use as vehicles for many of the asset classes used in your portfolios.

David Booth is clearly a brilliant man, and a rich man. But the main purpose of this information is to
show the relationship that DFA has with this business school. Chicago boasts more Nobel Prize
winners in Economics' than any other school in the world. Since DFA uses many of UC's (and other
top business school's) professors and their research in developing DFA funds, we thought the
extremely close relationship that Booth and DFA and UC's business school continue to have was
very interesting. Perhaps money can't buy you love, but it may just help your long term portfolio
performance for years to come.

First Quarter 2009 Asset Class Returns

The chart below shows what we all knew: the first quarter of 2009 brought the market to its lowest
point of this bear market. All asset classes were affected; however, looking carefully, you may
notice that the classes that got pounded down the most during the last year and half had a better
time of it this last quarter. International Small Caps and Emerging Markets have gone from the worst
equity performers to the best this last quarter. Otherwise, Domestic Growth seemed to out perform
Value on both sides of the ocean. Even Income suffered losses due to slightly increasing interest
rates during the quarter.

The most interesting part of the quarter remains hidden in the monthly figures. Looking at the month
of March, which marked the low point of this bear market on March 9, we can see that a dramatic
shift took place thereafter. As was discussed in the beginning of this report, there can be no
guarantee that the bottom of the bear market has occurred. Clearly, however, this was a meaningful
trend change. Only with additional time will we know if March 9th was the bottom. In the meantime,
our clients can be certain that they will have been invested properly and will fully participate in the
new bull market, whenever that occurs. We will not have to try and guess which of the many bear
market bounces are fakes, and which one ultimately is the birth of the new bull.

This spring promises to be an interesting one -- on Wall Street as well as your back yard. Get
outside and enjoy the change of seasons.


Frederick F. Kramer IV, JD
Chief Investment Officer