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Market & Economic Brief

November 19, 2008

WORLD MARKETS
After attempting a rally earlier in the month, U.S. stocks broke recent support levels and established fresh lows. Commodities and World REITs have also found new lows. Many international stock markets are still maintaining previous support levels. Intermediate term U.S. treasuries continue to rally in a flight to quality. The near term bias has again turned negative for stocks.

WORLD ECONOMY
The weekly leading and monthly coincident indexes we follow continue to weaken, suggesting more trouble ahead for the U.S. economy. Many European countries continue to report deteriorating economic conditions as well. China reported a dip in October retail sales but consumer spending has held up better than many other parts of their economy.

INFLATION DATA
Producer costs fell a record 2.8% in October, led by a huge decline in energy prices. Future inflation indicators we track also continue to decline.

U.S. RESIDENTIAL HOUSING
The Nat’l Association of Home Builders fell to its lowest level since 1985 in November. Home prices declined in 4 out of 5 cities during Q3. The FDIC has proposed using $24 bil. of the TARP funds to help stem foreclosures. The leading home price index we track rose slightly for August (the latest data available). Additional increases may signal a bottom in housing prices.

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About Index Investing

Index investing has been around for decades, and today it is herald as one of the most efficient ways to invest your money. Well known investors like Warren Buffet, Charles Schwab, John Bogle (founder of Vanguard), and Peter Lynch (famous Fidelity Magellan Fund manager) and many others have publicly endorsed index investing as a very efficient method for investors to expose themselves to stock investments.

Some of the more notable advantages to index investing include:

Low Cost
Near Market Rate of Return
Pure Asset Classification
Low Tax Exposure
Investment Transparency

THE ROLE OF INDEX INVESTING

The world of index investing has expanded rapidly. Still, many advisors/consultants are not deploying them fully. Initially index investments were limited to traditional indexes like the S&P 500 and NASDAQ 100.

Today many exchange traded funds (international, small company, industry sector, investment style, real estate investment trusts, commodity, and other asset-classes) have been introduced, offering tremendous utility for those investors seeking exposure to a broad representation of the investment universe.

OUR APPROACH

For the portfolio manager, the advantages of using indexes can be tremendous. Today the ability to pin point a group of stocks based on dividend yield, market capitalization, industry sector, fundamentals, geographic location, or other characteristics has improved immensely. This capability provides the portfolio manager with the ability to be very specific about what assets are held in the portfolio at any given time.

At Dightman Capital we place our portfolio construction emphasis on determining which indexes should be included and how much weight each one should represent in the portfolio versus which mutual fund or seperate account manager is going to beat their investment benchmark this year (most don't, and those that do rarely repeat).⁽¹⁾

(1) Journal Of Financial Planning, “The Difficulty of Selecting Superior Mutual Fund Performance” February 2006