The following is reprinted with permission from the December 2008 issue of the Investor Advisory Service, published November 28, 2008 by ICLUBcentral Inc.

Investment Comments

There is now little doubt that the U.S. economy is in recession. Since World War II, there have been 10 recessions, each lasting between 6-16 months. The S&P 500 has declined an average of 24% during past recessions, and the recent 45% drop puts us among the very worst recession-driven bear markets. Sometimes it only took months to recover from a shallow bear market. However, during the two worst downturns, it took 5-1/2 years for the market to regain its previous highs. While that might not be an encouraging prospect, it would represent an approximate doubling from where we are now. Markets recover well in advance of renewed economic growth. On average, the market has been 24% higher six months after a recession low.

This entire mess started when homeowners with low credit scores started defaulting on their mortgages. Housing prices were already weak, and foreclosures promoted further weakness. The economy continued to grow despite this drag, perhaps until late summer. By late summer, Wall Street problems had spread to Main Street. The value of mortgage-related investments continued to slide, ultimately leading to the demise of Fannie Mae, Freddie Mac and Lehman. These insolvencies triggered a severe loss of confidence among banks and consumers. The worst point in the stock market in October coincided with the height of the credit freeze.

We tend to focus on more stable companies than the overall market. About one-quarter of our recommendations are in the medical industry, double the S&P's allocation to medical stocks. We also have significant representation in service companies, which tend to operate under long-term contracts with stable cash flow even in times of economic weakness. We have no exposure to automotive companies. Even popular holding O'Reilly Automotive is a retailer of after-market parts that should do well since consumers are not buying new cars. It is not a manufacturer of parts or in any way related to new car sales.

Our focus on more stable companies certainly helped our selections perform well early in the downturn, until October. In October, even the good stuff went down. We suspect that speculative hedge funds needed to sell securities to make up for losses on riskier investments and mutual funds needed to raise cash to meet redemption requests. As the market declined in October, we suspect that these investors sold stocks that had held up relatively well because on some days we could see the higher quality stocks going down as much, or in some cases even more, than the lower quality ones.

We took a sample of our most common selections. These stocks experienced a collective 6% increase in third quarter profits while reports show that the S&P 500 profits declined 24%. The outlook for these same companies is for 7% growth in profits next year, despite the ongoing recession. We don't know yet what the outlook is for the companies comprising the S&P 500.

There are signs that the $700 billion bank bailout is starting to work. We cringe when we hear the popular media term "Wall Street bailout" because the truth is that the money is going to regular banks, not to big Wall Street firms like Goldman Sachs and Merrill Lynch (although both stand to benefit given changes that they have recently made.) Since early October, the premium charged when banks lend to one another has fallen in half, which is a very good sign. It is still elevated, indicating that banks aren't totally trusting in one another. However, the bank bailout was designed to get banks working together again and it seems that this is starting to work.

The bottom line is that we've seen many recessions and bear markets. They can be quite painful at the time, but they do end. This market decline rivals severe bear markets in the past, but our companies are typically finding ways to grow despite the economy and this gives us encouragement while we look forward to future economic growth and a higher market.

© 2008 ICLUBcentral Inc.