Client Letter

Below is a copy of a letter we sent our clients earlier this week:

We debated calling this note a Downdate what with the S&P 500 down over 53% from its high, residential real estate down over 25% from its peak, the unemployment rate over 8%, questions about bank solvency persisting and lingering problems in the credit markets. It is really tough out there. So what do we do now?

We could move out of stocks and into cash. When the market is declining daily, cash allows us to sleep better. While that sounds appealing, we don’t think it is the right course. If the stock market turns around soon, those holding only cash will miss out on what could be some pretty attractive gains. Their only return will be the low interest rate being paid by money market funds or short term bonds or CDs.

With funds not needed for several years we plan to stick with stocks. Why? Because you run the risk of missing some attractive gains when stocks do turn up; and they will turn up. We cannot tell you when that will happen or how much further stocks may decline before they turn up. Our instincts do tell us we are near some kind of bottom. The pessimism and negativity coming from writers, television personalities and virtually anyone we talk to is at extreme levels. And valuations appear attractive, with many stocks selling at low multiples on earnings and cash flow, while offering nice dividend yields. This is true even for companies that are not impacted by the disruption in the credit markets like Sysco, Paychex, Microsoft, Nike, Corning, Johnson & Johnson and Stryker with little or no debt. Of course, there is risk, but the potential returns can be quite appealing.

The other question we asked ourselves is what did we learn? Looking back over the past year, we significantly underestimated the degree of disruption in the credit markets and its impact on financial institutions. We also were too slow in seeing the impact the credit crisis would have on the rest of the economy. We are disappointed in ourselves and are confident that we can do better. For example, we have sharpened our focus on the types of companies that we purchase, weeding out any that have more than minimal balance sheet risk.

We are sure that during this period you, your family, friends and neighbors have felt the impact of the weak economy in some way. It is a very disconcerting time. But we are confident that better days are ahead. Patience has become an overused term lately, but it is still valid. Things will improve.

If you would like to talk about your investments or our thoughts on what is taking place in the markets, please give us a call.


(Disclosure: Harvest Financial Partners owns Sysco, Paychex, Microsoft, Nike, Corning, Johnson & Johnson and Stryker in its client portfolios. The authors own Sysco, Paychex, Microsoft, Nike, Corning, Johnson & Johnson and Stryker in their personal portfolio. Positions may change at any time.)