Welcome to the August 2012 edition of our newsletter. This month the markets continued their gradual climb upward with the S&P 500 up 2.3%. The Dow was up only have of that, but the international market was up slightly better as the dollar has strengthened against the Euro. The market dipped down the first two days of August on fears from Europe before remembering that it had decided that that issue was being dealt with. The last three weeks saw the markets settle into a very quiet range with little volatility.

Always remember that the market is just a barometer of the mass attitude of the investing public. If more buyers come in, prices rise. If more sells show up, prices drop. Notice on this chart of the S&P 500 where the buyers were only able to push the market up to a lower high followed by a lower low. Next, another slightly lower high before turning down again. This can mean that the buyers are running out of steam and the market is setting up for a decline. Or, it could mean that the market is only able to propel to this height with the news that it currently has and will need more, good information in order to justify attracting more or new buyers to resume its climb. Time will tell and we will react accordingly.

This might be easier to understand if we look back over a longer period. This chart shows the value of the S&P 500 from March of 2000 (where it peaked) through the end of August 2012. Over this 12 year period, we saw two massive market meltdowns; the likes of which we had only seen twice before: in the Great Depression from 1929 to 1934 and in 1973-74. According to the chart, the market was down 8.16% over this 12 years. Think about where the masses minds were during this dramatic time; huge selloff from 2000-2002 as people fled the markets in droves after the tech bubble burst. Once the bottom was reached and all the fearful sellers had bailed out, the market started a steady recovery. That is until the credit crisis hit 2008 and again folks ran for the hills with their money as the fear was that the financial markets might collapse completely. As I’ve said many times, I don’t know exactly how close we came to a complete system failure at that time, but I promise you we have never been closer. By far the most frightening time I’ve ever seen.

But look what happens if we look at just the last 10 years; from July of 2002 through August 2012. The chart shows the market increased over that time period by 64.48%. That’s a very different picture than the negative 8% we saw for the full 12 years and it illustrates how damaging that first drop was. Each of these two drops showed how the market prices in complete disaster, but once cooler heads prevail the values resume their natural climb, even when things are anything but normal. This shows the power of attempting to avoid the worst of these market drops.

With the gains stalling out toward the end of August, we did see a reduction in our equity holdings and went from 80% to about 60% invested on the equity side. We’ll wait for direction from the markets to see if we’ll pull back more or if the market increases will resume.
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