By JOHN PETRICK Special to the Palisadian-Post With the financial and housing sectors near meltdown, the U.S. government has been taking steps not seen since the savings and loan crisis in the late 1980s. What started as a fairly simple three-page proposal from the Bush administration effectively giving the Treasury unconstrained power to coordinate a bailout of the country’s financial system ended on Monday. As the vote by House members was shown on TV, stocks plunged and investors fled to the safety of the credit markets, worrying that the financial system would now keep sinking under the weight of failed mortgage debt.   Lawmakers voted down a plan that was different from what the Bush administration had originally proposed. The Treasury would have been permitted to spend $250 billion to buy banks’ risky assets, giving them a much-needed cash infusion. There also would be another $100 billion for use at the president’s discretion and a final $350 billion if Congress approved. In response, the markets turned highly volatile as it became clear the measure wouldn’t find the necessary support. At its low, the Dow Jones Industrial average broke its previous record for an intraday drop set during the first trading day after the September 11, 2001 terrorist attacks. Still, in percentage terms, the seven-percent decline remained well below the more than 20 percent drops seen in October 1987 and October 1929. Originally deemed a Troubled Asset Relief Program (TARP) by Treasury Secretary Henry Paulson, the now Emergency Economic Stabilization Act of 2008 (EESA) was created to essentially empower the Treasury to purchase distressed mortgage debt. Similar to what we saw during the S&L crisis, the Treasury had planned to set up a holding company to house these mortgages akin to the Resolution Trust Corporation (RTC) that was created in 1989. The RTC took into receivership financial institutions that had shifted away from traditional home mortgage financing and had overextended themselves by getting into new, high-risk investment activities. It pooled all of the bad loans, separated them based on quality and sold them off in ‘slices’ by auction. From start to finish the procedure took six years, but by taking control of the assets and controlling the sales of the assets the government was able to contain the costs to taxpayers by preventing a fire sale via a distressed liquidation process. The U.S. General Accounting Office estimated the final cost of the crisis to be around $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government, or in other words, the U.S. taxpayer, either directly or through charges on their savings and loan accounts. Did it work? The outcome was highly debatable. Some claim that since the RTC eventually needed much more money than initially projected, this led to big costs to the U.S. taxpayer and contributed significantly to the budget deficits in the early 1990s. However, the RTC was responsible for closing 747 thrifts with assets totaling $394 billion, and this accomplished its overriding goal: end the crisis, which like today, was threatening a massive drain not only in the U.S. but throughout the global economy. In the early to mid-1990s, lower interest rates and a slightly improving economy eventually eased the chokehold on the thrifts and we began to get out of the woods. Had it passed, could the EESA do the same?   Clearly, economic growth has slowed, but it has yet to contract meaningfully as it is likely to do if acute steps to avert a deepening of the financial crisis are not taken. However, there are clear differences between then and now. Primarily, the underlying assets of the brick-and-mortar S&L’s were reasonably easy to price and sell. On the other hand, the values of numerous, confusing, complex financial instruments today are far more difficult to assess. The RTC took over hard assets by taking control of the failing banks, whereas the actions today consist of taking over the banks’ failing assets. Is $700 billion big enough? Will breaking up the $700 billion into numerous smaller ‘slices’ abate the impact of the plan? Under the agreement, the government would have only been responsible for buying mortgages originated on or before March 14, 2008. Had the EESA passed, its success would have contingent on whether or not the capital infusion was large enough to have had the capability to buy an enormous amount of ‘bad debt.’ It wouldn’t have necessarily had to buy all of the ‘bad debt,’ but it would have had to clearly show that it is capable of doing so. The current market pressures have forced selling on these mortgage securities and has quite possibly pushed their price below their true fundamental values. Similar to the steps taken in the RTC, some sort of government action is needed, and the government must acquire these assets to alleviate the fire sale. However, it must purchase them above current values to entice the brokers to sell them, yet the purchase price must still be below the fundamental value in order to avoid overburdening taxpayers. Accomplishing the aforementioned steps should have effectively stabilized the financial markets and stopped the free-fall in these mortgage-backed securities. The hope would have been that passing such a bill would ultimately alleviate the pressure banks have been feeling amidst the credit crunch and begin to create additional liquidity in the markets. Why it didn’t pass? Over the weekend there had been much debate over executive pay, government oversight, taxpayer protection and assistance for troubled homeowners. It seemed that by Monday morning most of the above had been agreed upon, excluding an effort to give judges the power to modify mortgage terms for people who had filed for bankruptcy. Warnings from the President, the Secretary of the Treasury and the Chairman of the Federal Reserve that the approval of the plan was essential to the future of the economy were dismissed, and so was the EESA. Some major concerns were that this program, much like the RTC, was a bailout and would have ultimately fallen in the lap of taxpayers. In an effort to alleviate the long-term burden, taxpayers would have been given an ownership stake in companies whose bad assets were purchased. That in itself proved to be a major issue amongst voters who felt it was a big step away from the basis of American capitalism and a step closer to socialism and could set a scary precedent for the future. The government had already moved in and taken Fannie Mae and Freddie Mac into conservatorship, a step that many had viewed as a step towards nationalization. Another concern was one purely political in nature. With the elections looking and the constant talk of ‘Wall Street vs. Main Street,’ many elected officials felt the bill was viewed negatively by the majority of their ‘Main Street’ constituents and a vote for the bill could mean a vote against their future employment. This egocentric view may have easily swayed some from their true beliefs and led them to vote differently from what got them elected in the first place. Monday’s setback may ultimately prove to be a positive. Many felt that the original bill, even after modifications, was thrown together hastily and hadn’t been thoroughly thought through, based on the short time horizon everybody had been given. This week’s delay should provide more time for lawmakers to brainstorm and put together a deal that, if passed, can ultimately prove more effective in the long run. What now? As we look to coming days, weeks and months ahead, the EESA will likely be revisited and reconstructed from the ground up with Monday’s market failure in mind. It can be assumed that many in the House needed to see the violent upheaval the markets showed to have a better understanding about just how important some sort of plan is. Once there is an agreement and a plan is passed, it should prove to be positive as the uncertainty surrounding the financial markets will be alleviated. In the meantime, declining property values and worries surrounding the credit crunch coupled with a global economic slowdown will most likely lead us into a recession (if we aren’t there already) by year’s end and likely through much if not all of 2009. It is important to remember that financial markets are forecasting instruments, and that the stock market historically bottoms well ahead of the end of recessions. Typically, markets tend to gain 25 percent off their lows before a recession is over. A good example would be to study what happened during the creation of the RTC. The S&P 500 bottomed in October 1990 following the creation of the RTC in 1989. The U.S. economy went on to experience a recession in the second half of 1990 through early 1991. That’s the good news. The bad news is that this isn’t 1989 and this isn’t the S&L crisis. Today’s plan will likely be much grander in scale. The original estimates on the failed EESA were over four times bigger than the RTC. Currently, Wall Street analysts’ consensus expectations are for the S&P 500’s corporate operating earnings per share to grow at a pace between 20 to 25 percent. But with economic growth slowing and likely to remain below average, this seems to be exceedingly optimistic. What should this mean for you? Recently, panic has set in and almost everyone wants out. One benefit the stock market provides that real estate doesn’t is liquidity. Selling your house can be a time-consuming process, sometimes taking months before you’ve closed escrow and received your check. With the stock market you can have your cash in a matter of seconds. With emotions running high, this can quickly lead to panic and panic can lead to ill-advised decisions. The S&P 500 index has been used as a broad-based benchmark of U.S. stocks since 1926. On average, annual returns over this period were around 10 percent a year. But in most years they were anything but ‘average.’ In actuality, only four times annually did the market fall within the range of 8 to 12 percent. That being said, the market as a whole moves in bursts, both to the upside and to the downside. These rapid swings to the downside trigger fear selling and many times cause people to miss some of the biggest up days that tend to follow. To put this in perspective, an investment in the S&P 500 Index from the end of 1987 through the end of 2007 (approximately 5,000 trading days) would have returned 11.82 percent (excluding the effect of dividends). But missing just the best 10 days in this 20-year period would have reduced that average annual return to 9.35 percent. Moreover, if you had missed the top 100 days in this period, your return would be negative. A key element to surviving a down market is staying committed to a intelligent plan ‘ one that makes sense given your investment goals, time horizon and risk tolerance. With the recent volatile gyrations in the market, many investors have fallen prey to emotions and have let their long-term plans fall by the wayside. It is essential to stick to your plan and not allow your emotions to control your decision-making. No one ever made money panicking; cooler heads will prevail. (John Petrick, a native of Pacific Palisades, is a Registered Representative with and Securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 310-445-2504 or e-mailed at john.petrick@lpl.com. All performance referenced is historical and is no guarantee of future results. Please consult your financial advisor prior to investing.)

By DAVID FRIED Special to the Palisadian-Post These are hard times to be in or stay in the stock market. In just one week alone (September 17 to September 24), the Dow Jones Industrials had four days with price movements either up or down at least 300 points. This was followed on September 29 by the single biggest point decline (though not percentage decline) in stock market history: 778 points.   Wouldn’t it be great to know ahead of time what way the market will move next? Unfortunately, we cannot predict when the market will fly and when it will tank.   It’s not just hard to time the market, it’s impossible, so we strongly advise that you don’t attempt it. This simple warning is among the most important rules of investing. It also happens to be among the most important rules broken in investing, because many people think or hope they can do it. Unfortunately, what they usually end up doing is underperforming the market.   Not convinced? Try this simple experiment: Watch one of the financial channels for an hour, and the truth will dawn as you watch one analyst say stocks are rising, while the next predicts a plummet, and a third suggests that first they will rise, then they will fall, but overall the result will be flatline.   If you consider some of the information that flies at investors all the time, it should be no surprise that there is confusion in the market. For example, at the end of August the Labor Department said new applications for unemployment insurance rose by 15,000 from the previous week. However, that followed three consecutive weeks of a decline of more than 10,000 applications per week. Another example: On Monday, September 22, a barrel of oil ranged in price from about $100 to $130 in one day (!)’the largest absolute and percentage daily change ever.   And so it goes: the ongoing push/pull of competing information. The market is so complex, comprising so much information from so many different sources and factoring in countless unknown future events, that no one can possibly know when it is going up or down. So please resist the urge. The experts even admit they don’t know how to do it, and they advise you not to do it.   Fortunately, there are some telltale signs. On September 24, legendary investor Warren Buffet invested $5 billion in Goldman Sachs. In addition to the 10 percent dividend on the preferred stock he bought, Buffett will receive warrants to buy another $5 billion worth of common stock. The warrants will be valuable only if the stock goes up, so Buffett is betting on that scenario. Also, Microsoft, Nike and Hewlett-Packard have announced that they will begin to repurchase stock’over $50 billion between these three companies alone! All together, some pretty smart money has stepped up to buy. At the same time, many people are in a panic. Will the current downturn last another day, another week, another quarter or another year? Who knows? And how much lower can a 401 (k) go before its owner fears his retirement is melting away?   Behavioral finance teaches us that markets will almost always disappoint the majority of investors. Today that majority has run for the hills. They are likely to be disappointed that the market doesn’t go down to the levels they expect and even more disappointed when they discover they have missed out on the market’s next ‘up leg.’   This brings us back to the question of timing the market. On timing, legendary investor Peter Lynch said, ‘The real key to making money in stocks is not to get scared out of them.’ Warren Buffett wrote in his Berkshire Hathaway 2004 Chairman’s Letter, ‘Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.’ And Philip Carret, the investor Warren Buffett admires most, said, ‘If you buy stocks because of what you hope will happen next week, you are trying to be a market timer. I never knew anyone who could time the market consistently, so why even try?’ Benjamin Graham, Warren Buffett’s mentor and the grandfather of value investing, said, ‘There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he himself is a part.’   There are scores of analyses that show it’s not a good idea to try to time the market. People who try it most often wind up selling low and buying high, and they miss out on the surge. Arguments against timing are simple: the market is extremely volatile and impossible to predict. It’s falling-off-a-log easy to miss the best performing days, and, if you do, you will have far worse performance than if you had stayed put the entire time. When the market moves, it often tends to move in quick bursts, so by the time you wake up to the fact an advance has begun, much of it has passed. Miss that first part and you miss out on the bulk of the gains.   Let’s say, for example, that you want to believe you can beat the odds. Even if you think your ability to predict the market’s next move is higher than 50/50, the odds are still not in your favor. You must predict the correct time to sell AND also the correct time to buy again, which means you need to make two concurrent predictions of where prices are heading. Your odds at the machines in Las Vegas seem better than that.   As Buffett says, ‘Be greedy when people are fearful’ and if people aren’t fearful now, then I don’t know what fearful looks like. In 1998, people were greedy when they should have been fearful. It might surprise you to know that since January 1998 the market (as measured by the S&P 500) has gone up less than two percent annually! Remember how enthusiastic everyone was about buying more and more shares of the hottest tech stocks? No one would have believed then that the market would go almost nowhere for a decade. Likewise, no one believes now that the market will can go up from where we are now. I suspect that the crowd is as wrong now as they were then. Meanwhile, we opened the doors of Fried Asset Management, Inc. in 1998. Since then we have managed client assets in the stock market through the tech wreck, the Asian Contagion, the Russian Rubble crisis, the 2002 recession, September 11, and my favorite, Y2K. Remember when people sold stocks because they thought no one’s computer would work when the clock struck midnight on December 31 1999?   Somehow we have managed a return of about 11.5 percent a year since January 1, 1998. The funny thing is that had I known the market would be so bad over the ensuing decade I would have pursued a different line of work. The housing and credit crises are worse than any of the aforementioned situation. However, this too shall pass.   We can all hope that Congress will have passed the Treasury’s bailout plan in some form by the time you read this. If not, then the market will have reacted to that by the time you read this as well. In my opinion, that will be the beginning of the end of our current crisis.   If you are invested in the stock market you should think twice before selling when major corporations and investors like Warren Buffett are buying. To boot, we are still the most politically stable country in the world and our markets are about 25 percent off their all-time high. You should think twice more about going with the herd. They are almost always wrong. If you are out of the market, perhaps you should consider going back in now.   Feel free to call us at (310) 459-9196. We will try and put some perspective on all of this and would be glad to help you manage your portfolio for the next decade.   (Palisadian David Fried is the editor and publisher of The Buyback Letter, the only investment newsletter devoted to finding opportunities among companies that repurchase their own stock. His asset management firm ‘ Fried Asset Management, Inc. ‘ offers separate investor advisory and money-management services which use the ‘Buyback Strategy’ principles. He is an active member of the community and serves on the board of directors of LA Family Housing.)

Ten or twenty years from now, when the editors of the Palisadian-Post look back on the history of this new financial advice section, we’re sure of one thing: they’ll have an easy time referencing the week that Dollars and Sense debuted. We began editing this section on Monday, September 29, when the Dow 30 plunged a record 777.68 points, joining October 29, 1929, and October 19, 1987 as the bleakest days in Wall Street history. On Tuesday, when we sent the section to press, the Dow surged upward by 485 points, giving everyone’s 401(k) plans an encouraging, quarter-ending boost. On Wednesday’well, we can only hope that the market continued rallying while awaiting action by Congress. Whatever happens this week, and in the weeks to come, we trust that the 10 articles in this section can provide useful investment, insurance, tax and mortgage advice as we all try to weather these turbulent, rather scary times. On page 24, Palisades native John Petrick of Perennial Financial Services assesses the government’s bailout campaign, revisits the similar emergency plan to resolve the savings and loan crisis in 1989, and interprets what this all means to investors today. ‘Stick to your investment plan and don’t allow your emotions to control your decision-making,’ he advises. On page 25, David Fried of Palisades-based Fried Asset Management, warns: ‘It’s not just hard to time the stock market, it’s impossible, so we strongly advise that you don’t attempt it.’ He advocates staying the course with one’s stocks, and ‘if you are out of the market, perhaps you should consider going back in now.’ On pages 26 and 27, look for tax news from Anne Vogel, insurance counseling by Bob Jeffers (the town’s current Citizen of the Year), Trish Bowe and Nicholas Karilas, and an article headlined ‘The Truth about the Mortgage Market’ by Greg Roberts, who describes the nationwide mortgage woes and advises what this means to people buying and selling homes. All of these experts live right here in Pacific Palisades.   There’s also stock-market advice from a third local source, Palisadian Dan Fillinger of Edward Jones, who cites nine stocks for a well-balanced portfolio. He also notes, ‘Historically, the U.S. stock market performs very well after a bear market,’ which is where the market is at the moment. On page 28, The Gissell Group/Morgan Stanley writes about how a credit shelter trust protects a married couple’s assets while serving as ‘a tax-saving, estate-planning tool’to maximize the wealth they transfer to their beneficiaries.’ And on page 24, check out the timely column by Palisades resident Gregory Alper titled ‘Maintaining Emotional Stability in Times of Financial Turmoil.’ Yes!   We thank the many advertisers who made this section possible, and we look forward to their continued involvement in the issues ahead. The next Dollars and Sense section will appear in January as we strive to provide interesting and valuable financial advice for 2009. Story ideas and feedback are welcomed at: editor@palipost.com.