As you probably already know, we sold off several positions from your portfolio yesterday at the market open. We spent the weekend thinking through the issues of making such a big change and what the impact would be in your accounts.

We felt it was important to make a change to take the risk out of the portfolio, because of the continued market declines and a growing body of information that puts a darker outlook on the economy. We can be accused of being wrong by selling too soon or at the bottom of the market, but I am comfortable that we did the right thing by selling when we did.

What were we seeing to cause us to pull the plug?

1. The price trends had gone from being very positive to extremely bearish within a very short period of time. ( 5 weeks)
2. The total effect on the portfolio values had reached our limit as far as losses were concerned.
3. The macroeconomic story of political indecision and lack of resolve to solve problems in a positive way is an ongoing problem.
4. The impact of the growing European banking crisis has taken a decidedly negative turn, and the impact on the bond and stock markets in the US is just now being understood. I listened to a 90 minute conference call from Goldman Sachs and came away with the conclusion that US corporations have a much larger stake in Europe than most of us realize.
5. The rise in the gold markets and the drastic drop in yields for US treasuries tells us the institutional investors are bailing out.
6. I have seen several reports that the international banking system has what they call “plumbing problems”. What this means is that banks do not trust each other to make good on transactions between them without extra protection in place. This has shades of 2007/2008 written all over it.
7. From a technical point of view, the diversification relationship between our investments has gone away. This is not a comfortable place to be, so we need to fix it.

All these concerns lead to the question … what now?

It is our view that we should sit on the sidelines in cash for a while. We will add some short positions to the portfolios for aggressive investors.

The fact we are not in a recession and corporate profits keep grinding higher, we are hopeful we can find a way to re-enter the markets. You will be hearing from us in the next few days to discuss your worries and concerns.

Introspectively… Dick Kinney