Dear Prairie Post Subscribers:

These are difficult days for investors. Who could have predicated that of the five major investment banks in existence 3 months ago, only two would still exist? Mortgage giants Fannie Mae and Freddie Mac taken over by the federal government? Lehman Brothers in bankruptcy? AIG would be 80% owned by the Federal government?

Fear is a powerful emotion and investors are running scared. Although it’s wise to acknowledge the emotion, it is best to be dispassionate in our reactions. Although these headlines are significant, they are not unprecedented. For instance, the well respected major Wall Street firm Drexel Burnham Lambert declared bankruptcy in 1990.  Commentators foresaw this as a foreshadowing of doom for the stock market. We don’t have to tell you how the 1990’s actually turned out.

We’ve provided a summary of recent events and what it means.

What's Happening and Why

• Uncertainty and volatility in the markets has skyrocketed. The Dow fell 504 points on Monday, September 15th, the biggest daily point drop since the day the market reopened after the terrorist attacks of Sept. 11, 2001. (But Monday’s 4.4% percentage drop was far less than the 7.13% drop of Sept. 17, 2001 because the stock market has grown so much.) And even that pales beside the 22.6% decline of Black Monday in 1987.) Monday’s drop was followed by an uptick on Tuesday and deep decline on Wednesday and a major late-day rally on Thursday. Overall the week was marked with extreme volatility as investors reacted (and in some cases overreacted) to market conditions.





• The Federal Reserve, the US Treasury, and other governmental and regulatory organizations are involving themselves more deeply in the functioning (or dysfunctioning) of the financial systems and private enterprise than at any time since the bail out of Long Term Capital Management in 1998. And even that pales in comparison to what’s happening now.





• With banks hoarding cash, lending has nearly ceased. In an effort to keep the global financial system liquid, banks around the world have come together in a coordinated effort to pump money back into the system – in all, $180 billion.  Specifically, the Fed is working with the European Central Bank, the Swiss National Bank, the Bank of Japan, Bank of England and Bank of Canada.




• The current crisis is the result of a combination of factors that have been in place for several years, all of which resulted in an overleveraging by companies and individuals. The current upheaval among U.S. financial institutions is the result of a build-up of excess leverage in financial markets. The deleveraging now underway will likely result in a period of slower economic growth.

What's going on / What this means

• Grinding gears in the world's credit markets have driven up the cost of borrowing for businesses when they can get credit at all, while investors are also contending with fears that more big-name financial companies could falter.





• The worry in the markets has led to the demise of such major players as
  Washington Mutual, Wachovia and even the instability of investment banks Morgan Stanley and Goldman Sachs.





• Investors shying from the risks of stocks turned to government-backed debt. On Wednesday, September 17th, the 3-month Treasury bill — considered one of the safest short-duration assets — saw demand surge so high that its yield briefly dipped into negative territory for the first time since 1940. Investors are so focused on parking their money in safe assets that they're willing to take very little return on such investments.





• The implication for the economy of a period of deleveraging is for slower
  economic growth. During the last period of deleveraging in the early 1990’s, there was a recession in the U.S.





• From a market perspective, the average post-war recession saw a pull back in the major equity markets of 30%. Since reaching a peak on October 9, 2007, the market has declined 23%, so we still have a way to go just to get to average. The average bear market lasts just over a year, so here to, we have another month or two to go just to get to average. And there’s no guarantee that this time will be just average.

What's next / What to do

• The recent events emphasize that the credit crisis isn’t over. Issues from the U.S. housing market, one of the root causes of the current situation, continue to impact financial institutions. In the short term, there is also some contagion risk due to the high interconnectivity within the financial system and, by extension, across other sectors of the economy.





• Caution remains imperative as market volatility is likely to continue and further detrimental events are possible. Given the current low valuations, any sign of stabilization in the housing market or economic recovery could trigger gains in both equity and fixed income markets.

Market Index Information

With all of the recent market volatility, we have listed major market index performance below. As one can see from the table below, the broad equity markets have endured substantial losses since the beginning of the year while the fixed income market place has eked out a small gain.

Returns Data Source: Morningstar Advisor Workstation Office Edition

Inflation Data Source: Inflation Data.com, http://inflationdata.com/inflation/inflation_rate/CurrentInflation.asp
* Inflation YTD calculated using geometric average rate of return

How Blue Prairie Group is helping Plan Sponsors:

1. Since the sub prime crisis started in the summer of ’07, we have been evaluating client’s fixed income and stable value products conducting detailed holdings analysis looking for distressed securities and leveraged portfolios. We will continue to evaluate portfolios and make recommendations where appropriate.





2. We are reaching out to clients and speaking with them about their concerns.





3. We are reviewing all of our client’s custom target-date portfolios to determine if a reallocation is necessary.





4. We are drafting a communication piece for our retirement plan clients designed to be given to participants

Going Forward

To the question on everyone’s mind, “When will this end?”, we honestly don’t know.  We expect the market to continue to be volatile even with a bailout from Congress. We also know that this crisis is tied directly to the bursting of the housing bubble and it will take time for this sector to recover.

What we do know is when it comes to investing, the emotions of the moment often distract us from our purpose. And knowing this, we believe that staying the course is almost always the right thing to do. We are convinced that over time, we will get through the present financial problems, and our nation and investors will prosper again.

Investing is always full of ups and downs, but over time, well-diversified portfolios that are prudently managed can provide the answers for the needs of many. We need the courage to stay focused, not solely on the markets, but on the due diligent selection and monitoring process that has been the backbone of Blue Prairie Group’s success.

When the market is in turmoil, we think clients turn to us not to do something different, but to do what we have always done: Pay attention to risk, rely on a due diligent investment selection and monitoring process, and invest for the long term.

In these difficult times, Blue Prairie Group is focused on providing timely and relevant information to you. Please do not hesitate to contact us if you have questions.

Sincerely,

Blue Prairie Group Investment Committee:

Matt Gnabasik
Theresa Malone
Mark Olsen
Gary Silverman