Dear Friends and Clients:

Sadly, I write to you today with an obituary.

Capitalism – 1473 – 2008

The financial world mourns the loss of capitalism. While the death appears to be due to natural causes, sources close to the deceased say that the death may have been the result of foul play. Officials say that since no one really noticed the demise, an investigation is not likely at this time. In lieu of flowers, mandatory

“donations” will be made to the US Treasury.

In the 30 years I have been a CPA, and the 10 years I have been an investment advisor, I have probably learned as much from client behavior and observing the business and financial markets, as the advice and counsel I have taught to so many.

I have learned that free markets should be left to do what free markets do, without interference. The capitalist free market system is in fact, no different than the animal kingdom. The most fit, ingenious and capable survive, and those that are not, perish. The system constantly balances and rebalances itself, automatically, as God and nature designed. I have learned that man is not nearly as smart as he thinks he is, and that when he tries to breed a better African honey bee, or improve a local eco-system by introducing plants and animals that are not indigenous to the area, unexpected things happen. Bad things happen, in fact.

And so it goes for the free market system. “Bailing out” banks, who then use the money to buy other banks and feather their nests rather than make more credit available to the public was, well, unexpected. The treasury has thus far spent 350 billion in bailout money, yet there is no accountability as to exactly who got it, or where and how it was spent. Should we bail out an auto industry, controlled by greedy unions, producing lower quality, low mileage, higher cost cars that the competition easily beats? Why? What do we accomplish by helping the weaker animal survive a little longer, just to die another day at much greater cost to us all? Businesses that provide good service or product at a fair price thrive because that is what people want. It is a self balancing system, and interference only causes problems down the road, some of which we can’t even see right now. This mess started because the government mandated that banks and Fannie and Freddie make home loans to people who could not afford them. Perhaps achieving the American dream is something that is earned, not just given.

So why have I gone down this path today? Because we need to understand what has happened, what is going to happen now, and how to best protect our assets and indeed profit from this knowledge going forward. A good advisor should explain why he believes what he does.

Bailouts, stimulus packages, spending, printing money, and now % fed funds rates may do several things besides give the economy a lift in the short run, if at all. I see two scenarios. First, we could end up like Japan, in a period of stagnant growth for years or decades, despite 0% interest rates and stimulus efforts. Or, and I think this more likely, the trillions we are spending will have to be paid back, Taxes and inflation will skyrocket, and the value of the dollar will continue to decline against world currencies. If you doubt this, just look at how the price of gold, or the value of the Euro against the dollar has surged in the last several weeks as stocks declined. The government will have to borrow lots and lots of money by issuing more treasury obligations. To compete for these loans, (billions are owed to China alone) interest rates will skyrocket to entice lenders. When interest rates go up, mortgage rates go up, house sales go down, and businesses pay more interest and make less money (bad for stocks).

If we suspect this scenario then, it makes sense to be patient with fixed income investments – in other words, buy only very short, very high quality maturities now, and wait to buy longer maturities when interest rates go up. As for the equities allocation of your portfolio, what you own is more important than ever. I so often hear “my portfolio is way down, but I don’t want to sell now until the market goes back up”. Why? If the market goes up, you will have the illusion of success and keep underperformers or suffer higher future risk. If the market declines, you would have missed an opportunity to rebalance your portfolio in a more risk tolerant and performance manner. Now is the time to sell the under performers and buy investments better suited to capitalize on the coming economic events. You will make more money by separating the emotional tie to your investments. Consider a broader mix of international investments that will rise both because of stronger foreign economies, and, the results of rising foreign currency values against the dollar! Your investments are your employees – they work for you. If they are not performing, fire them and hire the right talent! I have the knowledge and experience to do the right thing for you. Call me for a free analysis of your portfolio (including IRA and 401(k)), and let me tell you what I think!

I wish you a happy holiday season and a healthy and prosperous new year.

Sincerely

Anthony C. Caruso

Certified Public Accountant

Personal Financial Specialist