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Rapidan Capital, LLCRegistered Investment Advisor510 Thornall StreetEdison, NJ 08837732.632.8854
F
IRST
Q
UARTER
2009
 
I
NVESTOR
L
ETTER
 
 April 29, 2009Dear Investor and Friends,The separately managed accounts called the Value-Aligned® Folios lost-8.6%forthe 1
st
quarter, moving ahead of the S&P 500
1
, which lost-11.0%, by+2.5%for the year.
2
 March’s gain of +8.8%in the S&P 500 index has been followed with an April gain of +9.5%! (As of April 29
th
), and the S&P 500 is now down-3.1%on the year.The Value-Aligned® Folios gained over+8.0%for April and are now just about flaton the year.While it is extremely pleasant for us to report to you that we havegained on the market and other investors so far in 2009, we know that like mostinvestors we are still nursing steep losses over the last 18 months.
3
 While a loss never feels good, we're very pleased to have done relatively better thanmany of our most admired competitors. Although we do not and cannot knowwhether this recent move up in stock prices is the beginning of a new bull market or just another bear market rally, you can be sure we our positioning to takeadvantage of the inevitable recovery.
STOCK MARKET REVIEW 
 
Today is the 100
th
day of President Barack Obama’s already historic administration.I waited until today to write a quarterly review letter because I wanted to makesure that we would get a complete picture of the beginning of the year since therally that started on March 9
th
went right on through April.In some ways, it seems like the stock market has been a walk through hell, and asSir Winston Churchill once said, “If you’re going through hell, keep going.” So wekeep going. We keep going through hell until the day when your humble moneymanager can define the new normal. We’re not there yet though.On March 9, the S&P 500 closed at a new panic low of 676.53.
 
 2In doing so, it completed a 17-month decline (on a closing basis) of very nearly-57% from its all-time high on October 9, 2007. This was the greatest decline of the post-WWII period.On a pure price basis,
this decline wiped out all the appreciation in the American equity market since 1996
. (Adding back dividends, the destruction"only" canceled out 11 years rather than 13.) And 2008 was the worst calendar yearfor stocks since 1931.Our business and government leaders and all of us everyday citizens are trying toget through the same perfect storm. And today we got another reminder that westill have a way to go. It turns out that first-quarter GDP fell another-6.1%whichis on top of the-6.3%decline in the last quarter of 2008. After a brutal 2008 and with economic activity plunging, the S&P 500 indexdropped another-8.4%in January and then another-10.7%in February. And yes as we all remember the market was down another-8.0%by the close on March 9
th
,less than two weeks into the last month of the quarter. (
I say we all rememberbecause I spoke to most of you on or around that day to help make the “big” decisionthat often determines long-term investing success – to get in or stay in, or run forcover in a panic.
) It was not easy but it was gratifying that all of you stayed in andagreed to try to save more to put more in stocks around here.In the near-term we have been rewarded, and it probably marks the beginning of double digit annual returns for 3 - 5 years to come. I’ll have more on that a bitlater.The first quarter of 2009 ended with a glimmer of hope that the worst is over for thestock market, as the S&P 500 Index rallied+17.9%from its bear market low set onMarch 9, 2009. For the month of March, the S&P 500 actually gained+8.8%,making it the
third best March on record
. However, it was not enough to savethe quarter, as the S&P 500 lost-11.0%for the first three months of 2009.Most of the first quarter records for the S&P 500 Index were set for abysmalperformance:
•
 
January’s loss of -8.4%was the worst January ever.
•
 
February’s loss of -10.7%was the second worst February ever.
•
 
The first two months’ cumulative loss of -18.2%was the worst ever.
•
 
The first quarter loss of -11.0%was the worst since 1939.
•
 
The first quarter produced thesixth consecutive quarterly loss, resulting in acumulative loss of -45.8%. The last time stocks fell for six quarters in a rowwas 1970.
 
 3 
 W 
HAT
D
ROVE
T
HE
M
 ARKET
?
Many factors drove the market lower during the first quarter. Fourth quarter 2008corporate earnings, reported in January and February, were much weaker thanexpected, as analysts had not yet caught up with the rapid deceleration of theeconomy. In addition, many companies were forced to slash their dividends andsuspend buybacks to conserve cash.The economy continued to deteriorate with most experts revising their forecastsdownward for all of 2009 and into 2010. The Obama administration’s budget, whichcalled for increased spending and a huge deficit, was poorly received by thefinancial markets. And while the global financial system was no longer on thebrink of collapse (we were told), the repeated injection of capital into major financialfirms raised the question of bank nationalization as the ultimate solution to thefinancial crisis. At its low point, the S&P Financial Sector Index had fallen -84%  from its February 2007 peak.
 
In its initial efforts to get its budget and stimulus package passed, the Obamaadministration warned of another Great Depression, an undefined
catastrophe
 where Americans lose their homes en masse, jobs disappear faster and faster andthe biggest banks go bust. All will be OK though, if, and only if, the President’s
aggressive
spending actions were approved. Don’t you feel better now?The message scared the heck out of Americans and investors everywhere. A CNN/Opinion Research survey released in March indicated that 45% of Americansbelieved that the U.S. will in fact enter another Great Depression within the nextyear! Stock market investors were spooked because it was clear that the scaretactics of the administration raised the prospects for historic deficit governmentspending and greater government involvement in the economy – and of coursehigher taxes on 100% of the people, not just taxpayers.
T
HE
D
OW 
G
IVES
U
P
12
 
 Y
EARS
O
F
P
ERFORMANCE
 –
 
B
ELIEVE
I
T
O
R
N
OT
 –
 
 A 
 
P
OSITIVE
I
NDICATOR
 
On March 2, 2009 the Dow Jones Industrial Average closed at 6763, its lowest levelsince February 5, 1997. According to JP Morgan Chase, this marked only the thirdtime since the index was created in 1896 that the Dow had retraced
12 years of performance
. The other two times signified a close proximity to a market bottom.The first occurred on April 8, 1932, approximately three months before the marketbottomed. The second instance was on December 6, 1974, this time marking theexact day that the market bottomed. This bear market reached its low point onMarch 9, 2009 at 6547. Hopefully, this indicator works again and we will not see anew bear market low. The Dow closed the quarter at 7609. It is at 8100 today.
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