Sunday, January 4, 2009


2008 Recap.

The best thing about 2008 is that it's over, a tough year for markets and economies worldwide. Paying attention to the stock market, equities, and our portfolios was as much fun as watching a cancer patient on chemotherapy. The majority of "experts" and pundits did not predict the downturn, and were caught off-guard by its severity and rapid decline.

But with the benefit of hindsight we now know for sure:

- This is a recession, which started in December 2007, and is now entering its 14th month. Our thanks to the U.S. Bureau of Economic Research for their December 1, 2008 report notifying us of this fact. We are looking forward to their next report stating the recession is over, a year after the fact.
- The stock market "correction" of August 2007 was not a correction but the start of a new bear market, preceding the recession by 4 months.

The U.S. stock market established a bottom on October 10, 2008 with the Dow at 7,900, and in a typical bear market move re-tested it a month later at 7,500. I expect future rallies to be short lived, and the lows re-tested a few times before the next secular bull market, which should be sometimes around Fall of this year.

Where are we headed now?

The longest recession on record was 43 months, following the 1929 stock market crash. The same "experts" who were wondering whether this was a recession, are now debating if this one will be like the Great Depression, Japan's self inflicted 18 years downturn, or a 1973-1974 style recession with a recovery late this year. I am betting on the latter.

The several $ trillions injected in the form of fiscal stimulus, financial and auto industry bailouts, near zero interest rates, and upcoming new infrastructure investments will find their way into the economy and start a new cycle, eventually. 2009 will be a year of transition on the way to recovery, with the next economic cycle driven by a back-to-basics focus on infrastructure, alternative energy technologies, and corporate capital investments as opposed to consumer spending.

The American consumer is bruised but not dead, and will shop again. Lower interest rates and fuel prices will provide more discretionary income, which will go toward debt reduction and slowly restore houselhold financial health. Jobs will drive consumption as opposed to the other way around.

Families continue to multiply and need new housing. This, along with a 75% reduction in new construction, lower interest rates, and return-to-normal bank lending, will help supply and demand get in check, eventually restoring real estate prices. It is important to note that, although we have been struggling with an over-supply due to excessive building, new foreclosed inventory, and qualified home buyers kept out of the market by frozen lending, demand for housing is still stable at roughly 5 million homes a year. The 2 million houses in foreclosure will be absorbed this year as banks liquidate them, finishing the end of the real estate downturn and restoring the balance between supply and demand .

Corporate profits will improve thanks to swift layoffs early during the recession, and as demand picks up so will new hiring. None of this will happen overnight, but conditions will improve day by day. The economy is cyclical, the world is not coming to an end, this down cycle will end like they all do.

The negatives

They are all around you. With the press competing to quickly document the rush of bad news, layoff's, dwindling portfolios, foreclosures, lack of loans, collapses of the auto and financial industry, it is easy to see no end to the tunnel. If you want all the reasons why the economy will continue to collapse, pick up the daily news and keep reading.

The positives

The collapse in the price of oil and commodities will have an enormously positive impact on the entire economy. A decline in oil from $147 to $40 a barrel puts $125 a month in the pockets of the average consumer, money that goes towards consumption or debt reduction.

Corporate America is not sitting still. Massive layoff's, while painful for the consumer losing his job, will restore companies' profitability and contribute to a healthy economy.

Interest rates are near zero, and will stay there for several years as the government embarks on a large borrowing program to fund infrastructure investments. Low rates help consumers stay afloat by keeping credit cards and mortgage payments low, and incentivize businesses to invest.

The new admistration will hit the ground running and quickly invest in massive new infrastructure and alternative energy programs, determined to make us more competitive and create new jobs. As an example of what these can do for the job market, California's new high speed train initiative will create 450,000 jobs. If every state embarked on similar programs, over 4 million jobs would be created.

Stock valuations are low with forward-looking P/E ratios under 10, a number that by traditional measures leaves plenty of upside. A lot of cash is sitting on the sidelines, with the average American portfolio sporting a record 42% in cash funds. Once the fears subside and business conditions return to normal, this money will flow back into stocks and mutual funds to generate higher returns.

While all of this may take some time to show its way through the economy, it eventually will and is very good for America's future.

2009 predictions

1. The top 10 performing U.S. traded equities are Altria (Phillip Morris' parent), General Electric, Apple, Intel, Microsoft, Pfizer, Deere, Citigroup, FXI (China ETF) and Harvest Energy (Canadian oil trust).
2. The Dow hits bottom at 7,200 but finishes 2009 with a 20% gain.
3. Chrysler goes bust, GM downsizes, Ford turns the corner.
4. The U.S. dollar settles at $1.20 Euro.
5. Gold ends 2009 under $500 an ounce.
6. After reaching $30 a barrel and $1.25 a gallon at the pump, oil trades in a $50 to $75 a barrel range and stays there for several years, with supply and demand in sync.
7. Fed Funds rates stay near zero.
8. The bubble in treasuries and bonds bursts and yields return to normal.
9. Residential housing continues to depreciate; reaches bottom some time in late 2009, flat lines for a few years, and starts appreciating significantly in Spring 2013.
10. Lending returns to normal in the summer and mortgage rates stabilize between 4 and 5%.
11. China and Japan lead a worldwide stock market recovery.
12. Osama bin Laden is captured on a tip from someone in his inside circle.
13. The war in Iraq ends abruptly this Summer with a chaotic Vietnam-like exit, at which point the U.S. dollar starts rising.
14. The recession ends in September.
15. Unemployment peaks at 9.8% toward the end of the year.
16. And, according to my wife GayLyn, people will wear more colorful clothing to make themselves look and feel better, and alcohol consumption shall of course be on the rise.

Sunday, November 16, 2008


Who else should we help?

The auto industry is pushing for a bailout and asking the American taxpayer for $34 billion in loan guarantees, arguing they can’t survive without it. If we agree then we should also bail several others:

1. Starbucks. If they can no longer sell $4 coffee because of something as trivial as people being unemployed, then it’s back to the way coffee used to taste decades ago, and nobody wants that. For less than $1 billion a year, the taxpayer can support Starbucks' continued expansion into exotic places like Laundromats, gas stations, and empty lobbies of investment banks and hedge funds.
2. Toll Brothers and Kaufman & Broad. What if all builders go under? We can't afford to lose the entire industry, where would we live? What if a million aliens invade the planet and need a place to stay? They must continue building, let's give them $10 billion.
3. Sun Microsystems, to save the 8,000 job cuts just announced. They are getting hammered by new competitors that came out of nowhere, Amazon, Yahoo and Google, who now sell something called “cloud computing”, which sounds like excess computer capacity dumped on the market at a fraction of the cost? Totally unfair. Sun invented Java for God sake; send a few billion dollars their way.
4. My country club. Do you have any idea how hard it is to sell $200,000 memberships in this environment? The members are real good guys and could use the money. In the scheme of things, we'd preserve a national landmark for under $10 million.

Are GM, Ford and Chrysler THE auto industry?

Although Speaker of the House Nancy Pelosi concedes the automakers may not be well managed companies, she says we can’t let them die because without them we would have no auto industry. Really? Let’s think about this for a second.

So GM, Ford and Chrysler represent a large segment employing 230,000 workers. How about the “other” auto industry outside of Detroit, the thriving assembly plants in the Carolina’s, Kentucky and Alabama that employ 130,000 people, and make BMW’s, Toyota’s, Honda’s and Nissan’s? And the new technology car makers sprouting in California, Fisker Automotive, Tesla Motors, Phoenix Motors and Aptera who make hybrids that get 130 mpg and all-electric vehicles with a 250 mile range?

What happens without a bailout?

The auto industry and Congress need to take a page from high tech. There an entire life cycle may be as short as 12 years, you adapt or die, and there are no bailouts. In the late 80’s, the “computer” industry died. Companies that made “mainframes”, the industry’s mainstay at the time, got killed by minicomputer makers who invented a better mouse trap and choked them. Big mainframe manufacturers Burroughs, Sperry Univac, Singer and Honeywell, became extinct. IBM lost 75% of its market value but survived, changed management, dropped the "blue suit white shirt and tie" uniform, and reinvented itself into a new diversified information technology company. New entrants Digital, Prime, Data General, Hewlett Packard, Wang and Tandem took the leadership and replaced the old generation. There were no bailouts, just good old fashion capitalism in action and the marketplace voting with its wallet. Later, those same minicomputer vendors got clobbered by Microsoft, Novell, Compaq, Dell and Apple, repeating another cycle in tech’s history. IBM and HP reinvented themselves and survived, others didn’t.

You may get what you asked for, but it may not be what you wanted.

Should we help out dinosaurs who make cars nobody buys? Or provide low cost loans to new breed entrepreneurs in California, whose customers are on 2 year waiting lists, so they can expand their plants and meet market demand? Between GM, Ford and Chrysler, one of them may figure out how to survive, but they are yesterday’s story and their time has come and gone. Meanwhile the car companies in the South will continue to thrive, we should replicate their success and incentivize other successful car makers to move there and create jobs. And we should place our bets on the new guys in California, they are tomorrow’s car industry and America's future, that's where the money and tax incentives need to go.

Write your congressman; tell him not to be a girlie-man: don’t support the bailout, let capitalism work.

Sunday, July 6, 2008


Paying $145 for a barrel of oil is the equivalent of bankrupting 2 American billionaires every day.

$2 billion leaves our country every day to buy oil from producing nations. Can you imagine two billionaires handing over their fortunes to foreign oil producers, every day, 365 days a year? That’s $2 BILLION PER DAY; almost $1 trillion a year out of America.

First, the facts on energy.

Today America consumes 21 million barrels of oil a day, roughly 25% of the world’s consumption, even though we represent less than 5% of the world’s population. 70% goes to transportation, with 48% attributed to cars and pick-up trucks, 16% to heavy trucks, and 6% to airlines. The average American drives 12,500 miles and burns 500 gallons of gas a year. Because we only produce 6 million barrels a day, we must import 15 million, with 50% of the imports coming from the Middle East.

The 1974 oil crisis caused us to implement energy efficiency measures, with the average mpg doubling from 14 mpg to almost 28 mpg between 1975 and 1990. By 1990, with a daily consumption of 18 million barrels, and abundant cheap oil, we lost our focus and allowed our fuel efficiency to decline, to a low of 26 mpg by 2008. Had we maintained the same rate of improvement, today our cars would average 55 mpg; we would not need to import oil and may even have a surplus.

From 1990 to 2008, the price of a barrel of oil increased almost 15 times, from $10 to $145. And since 2000, while the demand for oil doubled, and supply kept up with demand, the price of oil managed to go from $20 to $145 a barrel, a 7-fold increase!

In 1970, we produced enough energy to meet our own needs. Can we become self sufficient again? Here is a five step process.

1. American driver reduces consumption by 35% through behavioral changes:

- Car pool to work one week a month and eliminate 25% of commuter miles.
- Work from home one day a week and eliminate 20% of commuter miles.
- Car pool to take kids to and from one week a month reducing 25% of mom’s taxi miles.
- Aggregate errands in one trip instead of multiple and reduce by 25%.
- Slow down to 55 mph and increase mileage by 15%.
- Inflate tires to proper pressure and increase mileage by 5%.
- Ride bicycle on weekends.
- Walk to lunch.

Savings: 2.5 million barrels a day, 12% of overall consumption, 3 years to implement.

2. American driver increases gas mileage 35% by buying fuel efficient vehicles.

- Replace old vehicle with plug-in, hybrid, or high mileage car.
- Aptera, unlimited mpg on the first 60 miles, 130 miles per gallon in hybrid mode,
- Electrum, unlimited mpg, 150 miles range,
- Phoenix SUV, unlimited miles per gallon, 120 miles range,
- Honda Civic Hybrid, 45 mpg,
- Toyota Prius, 45 mpg,
- Smart, 45 mpg,
- And check out the Mercedes F700, a 50 mpg concept car for the next generation S class,

Savings: 2.5 million barrels a day, 12% of overall consumption, 5 years to implement.

3. Obsolescence on the 30% “other".

What falls in "the other 30%" is everything from power tools to plastic bottles and recyclable containers. We can systematically attack this category, gradually replacing oil powered tools with mechanisms powered by battery, electricity and natural gas. We can reduce the 1,000 pounds of annual waste produced by the average American down to 700 pounds. We can eliminate the plastic bottle water and replaceable containers.

Savings: 2 million barrels a day, 10% of overall consumption, 5 years to implement.

4. New truck efficiencies.

This can be achieved through extension of new technologies including hybrid, solar, and phasing out inefficient trucks.

Savings: 1 million barrels a day, 5% of overall consumption, 7 years to implement.

5. State and local governments embrace new public transportation initiatives.

Europe, Japan, and China have long enjoyed the convenience and comfort of bullet trains. They leave on time and arrive on time. They transport passengers comfortably from the center of town to their destinations, eliminating the necessity to drive to an airport far-away from the center of things. They are unaffected by weather and do not experience turbulence. Security checks are a breeze, everyone boards at the same time, no need to be there more than 15 minutes an advance. They eliminate the humiliating hassles and waste of time associated with air travel. They do not use gas, only electricity. No carbon monoxide, no pollution, hassle-free travel.

With speeds exceeding 200 miles an hour, these trains would connect downtown Los Angeles to San Francisco in 2 and ½ hours. Americans have been deprived of this luxury which has changed the lives of many travelers in the rest of the world. That is until now.

Coming on the ballot in November 2008 is a proposal to connect all major cities in California with such bullet trains, which would drastically improve its infrastructure and allow it to once again be a leader. This would require an initial assistance of $10 billion from the state, and be self-funded thereafter. This is the equivalent of what the U.S. sends to oil-producing nations in 5 days. The site offers additional information,

Savings: 2.2 million barrels a day, 11% of overall consumption, 10 years to implement.

Over the next several years, these combined initiatives gradually reduce our oil consumption by 50%. America, are we ready to go green?

Saturday, January 26, 2008


America, the "Vanilla Sky" economy.

Whether or not we are in a recession depends on who you talk to. If you are a consumer reeling from the loss of value in your home, no longer able to lower payments by refinancing your mortgage, or someone in residential real estate, construction or the mortgage industry, the answer is certainly YES. On the other hand, if you are in a more traditional industry such as pharmaceutical, transportation, food, energy, or a large technology firm, things are probably OK.

While experts continue debating, the economy is still chugging along. The unemployment rate is at 5.5%, up from a low of 4.5% a year ago, but far from the 8% to 10% levels seen in the early 90’s. But while the economy grew at a healthy 2% last year, profits have been declining, with earnings for S&P500 companies down in both third and fourth quarters of 2007. This is why I call it the “Vanilla Sky” economy, like the creepy 2001 movie where after a car crash Tom Cruise cannot figure out whether he is dead, alive, living a dream, or where reality lies. Business is growing but not profitably, and evidence of a slowdown is all around us. We are hanging on to our jobs but not getting raises because employers are making less money. We pay our bills but feel poor. The real estate downturn and market turmoil have caused our networths to decline. The banking crisis is making it near impossible to refinance our houses, get more cash and lower payments. Gone are the days of cashing lucrative stock options, flipping IPO's, day trading, or getting cash out of the house to pay bills and finance our life style.

So are we in a recession? And why is it so difficult to figure out?

The answer is we just went through a bubble. America has a history of bubbles: the energy crisis in the late 80’s, the busts in early 2000’s, and now real estate. All have the same root cause, too much money thrown at a sector for too long.

In the late 80’s government tax shelters caused enormous inflows into energy. You could put money into an oil and gas trust and immediately get a full return on your taxes, without a need for the venture to ever make a single profit, the equivalent of free money. It ended when the government changed the tax laws, causing a glut and an energy recession that lasted well into the 90’s. In the mid to late 90’s it was VC’s chasing the Internet gold rush, virtually throwing money at any high tech start-up with a pulse. The industry eventually went bust in 2001 and didn’t fully recover until four years later. And this century witnessed financial services firms in a heating frenzy to throw money at any consumer dead or alive, using growing home appreciation as collateral, in the belief they would never go down in value.

These trends start with decent business value propositions but eventually morph into the equivalent of a pyramid scheme as they gain too much momentum. And like pyramid schemes, they work for a while but end up badly, especially if you are the one holding the cards at the end. We always recover, but it takes several years. This bubble will be no different.

So again, are we or are we not in a recession and why can’t the experts agree on one or the other? The answer lies in the way our economy works. Just like a car, it is made of many parts, some functioning, some not. This economy feels like a car that works well for the most part, with the exception of the gear box which is frozen in third gear. It is moving but cannot accelerate, and at the same time it is not coming to a screeching halt. Our economy's "gear box" is of course the banking system, virtually frozen for six months, since the sub-prime crisis hit full course. The fed keeps greasing it, lowering interest rates and adding money into the financial system, hoping it will eventually crank itself out and work smoothly again. But the bankers, just now emerging from huge sub-prime mud piles after taking very large write-offs’s, are still a bit gun shy about jumping right back in.

Smart money is betting we are not in a recession, but that it will take some time for the financial system to clean itself and work smoothly again. A good barometer is Warren Buffet. He recently took sizeable positions into basic American industry, railroads, manufacturing and consumer staples. But he is staying clear of the financial sector, thinking there will be better opportunities ahead. If he thought we were heading into a recession, he would hold on to his cash and wait for a better time.

My predictions for 2008:

1. Economy recovers slowly in the second half of the year.
2. Banking system returns to normal by summer, as lending is simply too large a source of income for banks to ignore.
3. Fed reduces rates to 2.5%, mortgages decline below 5%.
4. Dollar peaks at €1.50 and gradually goes down to €1.25 by year end.
5. Oil ends 2008 in the $60’s. While demand for oil doubled in the past five years, the price quintupled. The slowdown in the economy will help synchronize supply and demand to a more rational level.
6. Residential housing continues to depreciate; reaches bottom some time in 2009, flat lines for a few years, and starts appreciating significantly in 2013.
7. Countrywide CEO Angelo Mozilo replaces Donald Trump on The Apprentice, who resigns from the show when he announces his candidacy for President of the United States.
8. Stock market recovers from mid year lows with the S&P500 reaching the 1600’s by end of year.
9. Google reaches $900.
10. Large cap stocks outperform.
11. Consumer staples, property and casualty insurance, energy and utilities, pharmaceutical and healthcare, selected growth large cap technology, and Japan outperform the market.
12. Financial services, home builders, small caps, and China underperform.

Monday, October 1, 2007


Real estate prices will not rebound any time soon.

Housing is cyclical and we had a tremendous 8 year cycle which produced 150% appreciation between 1997 and 2005. This cycle was extended past its natural course through unprecedented low mortgage rates which bottomed at 4% for "variable" rates that were fixed for 3 or 5 years. Also contributing to the boom were loosened lending rules such as “interest only” loans which keep the payments artificially low and “stated income” loans which bypass income verification, making loans available to people who would normally not qualify. In my home area of Southern California, the prior down cycle also coincidentally lasted 8 years, starting in 1989, bottoming in 1995, and rebounding in 1997, causing 20% haircuts from top to bottom.

These cycles always go through the same phases: greed, denial, fear, pain and resolution. First speculators disappear, prices become stagnant, and houses stay on the market. "For sale” signs creep up as demand vanishes and sellers sit on their houses longer, creating a greater supply and putting more downward pricing pressure. Sellers reduce their asking prices, builders offer special incentives. The inventory builds up, desperate sellers discount further, some default on their payments, and the repossession phase starts. Banks, who are not in the business of owning homes, dump them at or below what is owned on the mortgage. They tighten lending standards as they no longer want marginal buyers, reducing the pool of available buyers in the process. All this drives housing values further down. Builders continue to reduce production to meet the shrinking demand, and lay off employees who in turn put their homes on the market as they no longer can afford a mortgage. The vicious cycle continues until the stage where eventually supply and demand get back in balance, prices stabilize and homes start selling within a reasonable period of time.

Unlike the stock market where corrections take place in real time and sometimes overnight, real estate corrections are slow to go their course. A margin call from your broker forces you to take a loss and re-adjust your portfolio immediately. But if your property declines below the mortgage value, there is no “margin call” from the mortgage lender asking you to add equity or pay down the loan, unless you need to refinance or fail to meet payments. So naturally you will stay put longer and ride out your losses hoping for a turnaround.

This down cycle is just getting started. Inventories are still going up, standing at the highest levels since World War 2, and banks are just now gearing up for repossessions. With 4.5 million unsold homes, builders continuing to add new homes at the rate of 1.5 million a year, and the number of buyers shrinking to less than 6 million this year, there is no reason to think that prices will appreciate again any time soon. We have to work through the supply and demand imbalance, and this will take years, many years, as it always does.

What factors affect real estate and create demand?

1. A growing employment base. It is logical that new jobs cause people to move into the area, and create demand for housing. Regional real estate booms are closely tied to employment in the area. It is no coincidence that the Southern California real estate downturn took place when the aerospace industry , the area’s largest employer at the time, shed 100,000 jobs between 1989 and 1995, unemployment climbed to 10% in Los Angeles county, and real estate plummeted. It took several years for the booming entertainment industry to fill the void, become the region’s largest employer, and add enough new employment to fill the jobs and buildings left behind by the aerospace companies.

2. Interest rates. The single biggest factor affecting your house payment is the interest rate on the note. In 1990, an 11% interest fixed rate mortgage would set you back $3,335 a month for the principal and interest on a $350,000 mortgage. 14 years later in 2004, you could obtain an interest-only loan at 4%, borrow $1,000,000, and the same $3,335 a month would cover the minimum interest payment. So assuming a $100,000 downpayment, you now have the ability to buy a $1.1 million house for the same monthly payment that would have paid for a $450,000 house 17 years earlier. It is interesting to note that a house worth $450,000 in 1990 is now coincidently going for $1.1 million, illustrating what impact the rate reductions had on real estate appreciation during that time!

3. Availability of land for new construction. Some regions are completely built up and no longer react to the simple forces of employment and interest rates. For example, when the bubble burst, the 200,000 jobs lost in the Silicon Valley did not contribute to a major real estate decline because the housing supply was already extremely tight. The demand softened slightly for a few years until the new Google millionaires started the next wave. The same conditions are in place in Manhattan, Beverly Hills, Malibu, and Santa Barbara where normal market forces do not apply.


Unless you think 4.5 million aliens are about to invade the planet and snap up the entire inventory of homes available for sale, or the fed is no longer worried about inflation and will drastically lower rates, then housing is probably in the tanks for years to come.

At this time, Blue Lake Ventures is not investing in home builders or companies related to the building industry. We think it is prudent to wait for the consolidation to start before investing in this market segment. There will be opportunities, but not yet.

Friday, August 10, 2007


Trouble in paradise.

With recent turmoil in the market, headline news about sub-prime meltdown, several hedge funds collapsing, talks about "liquidity" crisis, and the Dow dropping hundreds of points on a daily basis, panicked investors are asking themselves if they should sell everything.

The answer is no. Yes the real estate industry is suffering, and yes hedge funds with sub-prime exposure are getting hit. While those events make excellent headlines which frighten investors and increase viewer readership, I view the current market downturn as a normal correction. We are in the fifth year of a long bull market which has gone virtually uninterrupted. The last correction was over a year ago during late Spring 2006, so it was simply overdue. 8% to 10% declines are common and a normal part of the health restoring process during bull markets, and you are witnessing one now.

Investors with a long term horizon of at least a few months will be nicely rewarded and should not get distracted by the headlines.

What are the key major factors that contribute to bear markets, and are they present today?

1. Excessive valuations. There was reason to be concerned about "irrational exhuberance" in the late 90's and early 2000's, when P/E ratios were in excess of 30. The high valuations in U.S. markets at that time contributed to a major downturn in the 2001-2002 period. The same thing happened a decade earlier to Japanese equities whose valuations had mushroomed to P/E ratios in the 50 range, eventually collapsing and causing a 12 year bear market for Japan.

None of those conditions are present today. The P/E ratio on the S&P 500 is in the high 15's range based upon 2007 earnings, and 14 based upon 2008 projected earnings. This is well below the acceptable range of 17 to 18, typical in environments such as the one we have today, with the economy growing moderately, contained inflation and relatively low interest rates.

The current downturn is paving the way for the S&P 500 index to grow into the 1700 area.

2. Recession. Bear markets tend to precede recessions, as stocks are purchased based upon growth expectations. So if you think company revenues will be lower next year you will naturally bid less for the shares.

The economy continues to chug along at a 2% to 3% rate. While it's nothing to get excited about, it is still very respectable, especially in the context of low unemployment rates in the 4.8% range and the fed's last two years of tightening rates.

3. High inflation. Investors flee equities during periods of high inflation, in favor of hard assets such as real estate. Inflation is bad for the stock market and equities in general.

With the current inflation in the 2% range, improvements in productivity, an abundant flow of cheap goods from China and India continuing to provide the american public the ability to maintain its pursuit of bargains, it would be hard to make a case for an inflationary environment. In addition the high price of oil also acts as a counter-inflation measure by taking a greater percentage of the consumers' wallets and curtailing their spending in other areas.

4. High interest rates. Rates and equities perform in opposite direction. During times of high interest rates, bonds attract risk free returns at the expense of equities, and valuation ratios drops. High interest rates are another market enemy.

While rates have gone up in the last 2 years, they are low by historical standards. Fed rates at 5.25%, the prime at 8.25%, mortgage rates in the mid 6's, may all be higher than a couple of years ago but way lower than 10 years ago. The current interest rate and money supply environment is favorable to equities and consistent with P/E ratios in the 17 range.

So, what do we do now and what should be expected?

Volatility will continue because investors are nervous and the headlines ugly. Investors should use this to their advantage by purchasing equities on down days. At this stage Gevity Ventures is investing in companies that meet the following characteristics:

1. Large capitalization with solid balance sheets. This is not a good environment for small caps, investors are looking for safety and established companies that can weather the storm.

2. Growth oriented. We are finding excellent value in the large high tech names, companies like Cisco, Microsoft, Symantec, Yahoo, Qualcomm, Dell and Intel. They have low valuations because to a great extent they failed to participate in the rally of the last 4 years and are now trading at attractive prices. Their balance sheets are solid with billions in cash and little or no debt.

3. Companies that pay dividends. We like some of the large banks that are trading at great discounts and reward investors with solid dividends like Bank of America and Citigroup. The brokerage industry also offers good valuations. I doubt Merrill Lynch, the Nasdaq, The New York Stock Exchange, Nomura Securities, all publicly traded organizations, are going out of business any time soon, and they are cheap. There is also excellent value in defensive stocks such as the food industry with Kraft (one of Warren Buffett's holdings), pharmaceuticals like Pfizer and Amgen, and great dividends with Canadian oil and gas trusts such as Pengrowth and Harvest Energy that yield in excess of 15%.

The stock market is in the middle of a storm and will get through it as it always eventually does. Patient and calm investors will be rewarded.