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YEAR-END 2008 MARKET COMMENTARY
Confirming our long-standing forecasts
1
:
•
 
The U.S. recession has been officially recognized.
•
 
The stock market has no gain for the past 12 years.
•
 
Investors have lost – not once, but twice – all stock-market gains.
•
 
The long-term stock-market P/E ratio is still declining.
•
 
GDP, corporate earnings, house prices, and auto sales are still dropping sharply.
•
 
The long-term downtrend in the U.S. dollar continues.
What a difference a couple of months make. There is no longer any question aboutwhether the U.S. is in recession. The official recession-dating organization, the National Bureauof Economic Research (NBER), announced the recession started in December 2007 according totheir criteria.
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What had long been obvious to Main Street is now undeniable by Wall Street.The calamitous economic and financial impact of the massive housing-market bust,homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securitiescollapsing, venerable financial institutions careening towards insolvency, the global financialsystem grinding to a halt, businesses shuttering, unemployment rising, consumer confidencebattered, and consumer spending plummeting has precipitated the most massive U.S. governmentintervention since the Great Depression in a desperate attempt to mitigate the damage.As economic realities increasingly forced investors to abandon the “irrationalcomplacency” that had characterized investor sentiment over the past couple of years, they soldmore and more of their equity holdings. The decline in the stock market that had started at thefinal high in October 2007 accelerated to the downside in the second half of 2008, nose-divingsome 53% thus far.In fact, not only has the entire overvaluation in the stock prices during the “bull trap”from late 2004 through late 2007 been more than completely erased (the red line in the chart onthe next page), consistent with our forecast during that time (see our further discussion below),but
all stock-market gains for the 12 years since early 1997 have been wiped out 
(the black linein the chart on the next page). That is to say, investors have now lost –
not once, but twice –
allof their stock-market gains from the final three years of the mania (1997-2000) forward, havingtaken all the risk of owning stocks and
having nothing to show for it.
 
1 Prior IF&M commentaries, which contain the record of IF&M’s past forecasts, are available upon request. Itshould not be assumed that forecasts made in the future will be accurate or will equal the accuracy of past forecasts.Nothing herein should be construed as a recommendation or performance forecast of a specific security.2 According to the NBER’s website, “a recession is a significant decline in economic activity spread across theeconomy, lasting more than a few months, normally visible in real GDP, real income, employment, industrialproduction, and wholesale-retail sales.”
 
 
 Thus, any investment manager who made
even $1 of gain
for their equity investorsduring this time by correctly anticipating and positioning their investments to avoid – and, in ourcase, to profit from – this stock-market decline
ranks among the top performers in the country.
To have done so with
relatively low risk 
means the risk-adjusted performance ranks
even higher.
Investors have lost –
not once, but twice 
 –all of their stock-market gains from thefinal three years of the mania (1997-2000)forward, having taken all the risk of owningstocks and
having nothing to show for it.
 
At the same time the stock market has made new lows, having declined 53% from itsOctober 2007 high (as has the diversified equity portion of investors’ portfolios),
all of our clients’ accounts made new highs
. Further, for the 9-year period from the March 2000 high, ourresearch shows that well over 90% of investors lost money in equities, and of the remaininginvestors, well over 90% experienced interim portfolio declines (drawdowns) many times greaterthan -10%. In comparison, we achieved positive, double-digit returns for
each
of our clients andnever exceeded our -10% drawdown tolerance (excluding fees) in
any
client’s portfolio. Webelieve this puts
our risk-adjusted performance in the top 1%
over the past nine years.2
Investment Forecasting & Management – Year-End 2008
 
Investment Forecasting & Management – Year-End 2008
3There is tremendous significance for us in the fact that all stock-market gains have been wipedout since 1997. That is exactly the year that bear-market expert Bob Bronson, principal of Bronson Capital Markets Research, our investment strategist, called the start of a roughly 12- to20-year period of essentially
no-gain for stocks
he terms a Supercycle Bear Market Period.
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 Some 12 years later,
his prescient forecast has proven true.
No other investment strategist in theworld made this exact call. (See further discussion of this forecast below.)
We note that 1997 is exactly the yearbear-market expert Bob Bronson called the start ofa 12- to 20-year period of essentially no-gain for stocks.Some 12 years later,
his prescient forecast has proven true.
No other investment strategist in the world made this call.
 
Our work strongly suggests
the decline is not over yet,
contrary to the permabulls’ hopethat some strong advances over the past couple months indicate a bottom was reached lastNovember
.
Bob Bronson has demonstrated that the path of a Supercycle Bear Market
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resemblesa ball bouncing down stairs, typically with bigger bounces off progressively lower steps. In fact,the largest one-day advances in stock-market history have all occurred during ongoingSupercycle Bear Market declines. Investors must be careful not to misjudge these retracementsas indications that the decline is over, regardless of the size of the bounce.Based on the factors in our forecasting models, some of which we discuss in eachcommentary,
we believe the stock market is poised to decline to substantially lower lows than the November 2008 low.
In our opinion, investors who buy or continue to hold stocks during theremainder of this second downleg of the Supercycle Bear Market will suffer
substantial losses
from current levels. Our clients are positioned to profit from such a decline.
 
In our opinion, investors who hold stocks duringthe remainder of this second downleg of theSupercycle Bear Market will suffer
substantial losses 
from current levels.
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A Bronson Asset Allocation Cycles (BAAC) Supercycle Bear Market Period is a 12- to 20-year period of underperformance during which bear markets, anticipating economic recessions, as well as the recessionsthemselves typically are at least twice as frequent and twice as severe in magnitude and duration as duringSupercycle Bull Market Periods. Such a period begins when the return on money market funds sustainably exceedsthe total return on equities, especially when downside-volatility-risk is taken into account. Further details are foundin our research paper, “Bronson Asset Allocation Cycles,” available on request.
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A Supercycle Bear Market is the most severe combination of the several bear markets typical during a SupercycleBear Market Period, running typically from the highest to lowest point in the Period. For example, during theprevious Supercycle Bear Market Period from 1965-82, the Supercycle Bear Market lasted for the six years from thehigh point in December 1968 to the low point in December 1974.
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