1. Helping You Navigate in an Uncertain Investment World
Year End 2009 Viewpoint
Volume 10 Issue 4
Inside this issue: Year End 2009 Special Addition Viewpoint
Front Seat-Our approach to
investing
2 Trying to make sense of the nonsense—These days that’s harder than ever
Chart 1, Market 2000-2009 4 breaking “over-valuations” achieved in 2000,
“America’s abundance was not created by public sacrifices
while the second is a long wave of wealth
to the common good, but by the productive genius of free
Chart 2, Market Rallies 5 men who pursued their own personal interests and the building based on a growing economy, grow-
making of their own private fortunes.” ing earnings and expanding P/E ratios from
Chart 3, S&P & Nikkei Index 6 — Ayn Rand long-term bear market lows of 1982 to 2000.
As much as we’d like to capitulate to the
O
Chart 4, Buying Higher Yields 7
F ALL THE STUFF THAT HAPPENED in growing view that the stock market is now
Interest Rate Outlook 8 2009—and take if from us, there was a officially and fully in a bull market and stop
lot of stuff—most of it not good—the having to defend our bearish stance each quar-
Doubling Income every 5 years 9 stock market rally was one of the ter, we can’t.
more notable. Of course, we’re Market Summary 2009 First, it’s simply not in our
Big-fat Gov’t Takeover 10 probably a little biased since we nature and we don’t mean it’s not
Annual Returns 2009
spend our day plastered in front of in our nature to be bullish. For the
Casey On Technology 11 US MARKETS 28.5 record, we were as bullish as the
a computer screen crocked full of
Truth-Stranger than Fiction 12 stock quotes. But that’s just us. GLOBAL EX-US 40.6 next guy all throughout the 1980s
After bottoming out in March, DEV MRKTS EX-US 38.1 and most of the 1990s, when being
the stock market as measured by bullish was justified by growing
EMERGING MRKTS 88.1 earnings and expanding price-to-
the Dow Jones Industrial Average
Deschaine & Company, L.L.C. was up a heady 57% through year CORE BONDS 4.6 earnings multiples. Just ask any-
A REGISTERED INVESTMENT ADVISOR
end—and the Dow was actually LT COMMODITY 18.3 one who knew us way back when.
the lagger among the major mar- Source: Morningstar Q4 2009 Funny thing is, no one accused us
ket averages. of being irrationally Pollyannaish.
World Headquarters Over the same period, the S&P
Market Commentary
Now that the stock market’s
128 South Fairway Drive 500 was up 63% while the NASDAQ compos- been in the throes of a long-term bear market
Belleville, Illinois 62223 ite was up a notably significant 75% just from (may we remind you that stocks haven’t produced
Phone: (618) 397-1002 March through year end. While stock market positive capital returns in over a decade) we think
mark@deschaineandcompany.com rallies are always a welcomed and appreciated it’s patently unfair to brand us “permanent
marnie@deschaineandcompany.com turn of events, the 2009 stock market rally bears” just because we’ve been right-on-the-
predictably has all manner and quality of stock money in our bearish stance on the stock mar-
Maryville Office market gurus, pundits and amateur prognosti- ket lo-these last ten years.
Jason Loyd cators alike hailing the end of the long-term So when we say it’s not in our nature,
(618) 288-2200 bear market for stocks. what we really mean is that it’s not in our na-
jason@deschaineandcompany.com While we certainly have no qualms with ture to go along with the crowd, since the
Highland Office stock market rallies in the generic sense, there crowd is usually and without fail—wrong. One
is an important distinction between stock mar- need only look no further than presidential
Matt Powers ket rallies of the “dead cat bounce in the midst elections or American Idol for proof of the col-
(618) 654-6262 of a long-term bear market variety and the lective ignorance of crowds.
matt@deschaineandcompany.com long-term price earnings multiple expanding An excellent and highly accurate measure
We’re on the Web at: variety. The first is a temporary reprieve from of the ignorance of crowds as it relates to in-
deschaineandcompany.com the relentless down beat of declining share vesting is the actions of the crowd takes when
prices in the process of correcting record (Continued on page 4)

2. Page 2 Year End 2009 Viewpoint
VIEW FROM THE FRONT SEAT by Mark J. Deschaine
We Take a Different Approach to Investing, Here’s Just a Few Examples
I ’M SURE YOU REALIZE THAT THE END OF DECEMBER marks the
end of the first decade of the new Millennium. What you may not
know is that is also marks the end of the first decade for Deschaine &
Company as a registered investment advisor.
Technically, the firm was registered as an investment advisor in
stocks. If stock prices never fluctuated, we’d never
have the opportunity to buy shares at cheap prices,
or as we prefer to say it: at “higher yields.”
Maybe the best way to understand our unique
approach is to compare and contrast it to some con-
April of 1997, but only so we could provide consulting services to other ventional views held by investors.
investment advisors. We actually didn’t take our first investment advisory
client until December 1999. On that date, assets under management were What’s my account’s current value? vs. How much income can my portfolio
a whopping $240,000 for two clients. A short ten years later, we’re re- generate? I know from personal experience that most investors focus on
sponsible for managing about $65 million for 120 clients. Going from one benchmark, and that is: “what’s my account’s current market value?”
$240,000 to $65 million, works out to an annual compounded growth rate Each month they open their account statement and immediately look at
in assets under management of about 75% a year. Not bad when you con- their portfolio market value, hoping, I suppose, to find that it’s gone up
sider the stock market is down about 20% over the same period. Needless each month, an unrealistic goal for sure. Not only that, but managing a
to say, we’re pleased with the firm’s growth. stock portfolio for monthly capital returns is completely beyond any in-
Without wallowing too deep into the usual year-end sentimentali- vestor’s control. Further, the volatile nature of the stock market guaran-
ties, our growth as a firm is a direct reflection of the confidence our clients tees an emotional rollercoaster ride as your portfolio market value fluctu-
have in us, and for that we ates—sometimes dra-
are eternally grateful. Mar- CONVENTIONAL THOUGHT PROCESS D&C’S INVESTMENT THOUGHT PROCESS matically—even in the
nie and I started Deschaine best of economic times.
& Company with one sim- What’s my account’s market value? How much safe income can your portfolio generate?
Over the last 129
ple goal: manage client How much is my account up / down this year? How much did your income grow this year? years, for example, the
assets the way we manage monthly returns for the
our own. And that, I can say Where is the stock market going this year? We don’t predict short-term swings in the market.
S&P 500 show that 45%
without any equivocation, is I bought XYZ at $20 hoping to sell it at $30 We buy XYZ stock at $20 for its 5% current yield. of the time the stock mar-
exactly what we’ve done ket was down the previ-
over the last ten years. XYZ is down to $10, I see no alternative but to sell XYZ is down to $10, but the dividend is intact, so we can ous month. Even the
it at a loss. buy more shares at $10 locking in a nice 10% yield.
most emotionally fit in-
Dividends or Bust? I need to grow my portfolio value to X, convert it to We invest your portfolio for income and income growth vestor is likely to get
Given our dividend fo- income producing assets to live off of the income. from the start, so you can retire and live off growing shaken psychological by
cused approach to equity income. Not the uncertainties of capital returns. the “normal” volatility of
investing we’re often the stock market.
asked, “is managing stocks for dividends all you do?” Our response is: “we In long-term bear markets, like the one we’re in now, they’re sure to
manage equity portfolios for dividend yield and dividend growth because get emotionally whip-sawed into making investment decisions that are
we happen to believe this is the best way to make money in the current detrimental to achieving their long-term investment objectives. Followed
economic and financial environment.” That is to say, a stock market still closely behind monitoring their portfolio value is the question:
fraught with considerable downside price risk (even more so now after stock
prices are up 60% since March 2009) and interest rates that are at unprece- “How much was my account up/down this year? vs. How much did your
dented lows.(1) (See Chart 5. on page 8). With interest rates near zero, obvi- investment income grow this year? We’re convinced we can safely grow
ously there’s little room for them to drop further, making bonds an espe- dividend income between 6-12% a year, and even greater when we’re able
cially risky investment when interest rates begin to reverse course and to reinvest a sizable chunk of the dividends every year into more shares;
head higher, which they’ll have to do—sooner or later. maximizing the power of compounding to grow portfolio income at dou-
We also happen to think that a portfolio that provides a steady and ble digit annual rates. Consider that since 2000 we’ve been able to grow
growing stream of dividend income is the best way to finance a financially portfolio income at better than 16% annually from growing dividends and
secure retirement for the ever increasing number of folks at or nearing dividend reinvestment. As I’ve pointed out on many times in these pages,
retirement, without having to sweat the disconcerting daily fluctuations in declining stock prices work to help us achieve the goal of growing income
stock prices—by the way. If you have a portfolio that’s invested in a diver- because every drop in stock prices allows us to capture higher and higher
sified group of strong companies that have the ability to grow their divi- dividends for the same dollar of investment. Frankly, after seeing this play
dends, and here is the important point—come hell or high water—why out over the last ten years, we’re surprised how few investors appreciate
would you ever be concerned about the short-term price fluctuations that the power of such a simple strategy, and that includes some of the most
are part and parcel to owning stocks. In fact, (and I’ve said this a million sophisticated investors in the world, as well as yours truly, for the first 20
times) price volatility works to the benefit of investors looking to buy
(Continued on page 3)
1) We believe today’s bond market is just the latest “bubble” in a decade of financial bubbles. Investing in long bonds or long-term bond funds at today’s interest rates is, in our opinion, the
riskiest move an investor can make. See feature article on page 8, for our reasoning. At some point, stocks will reach a point where they are dirt cheap on a P/E and a price-to-dividend basis. At
that point, we expect to have gobs of excess dividend income to throw at cheap growth stocks to capture the next long-term bull market. During bull markets, capital returns replace dividend
income as the primary source of investors returns. In bull markets, stock prices rise from growing earnings and expanding price/earnings multiples like they did from 1982 to 2000.

3. Deschaine & Company, L.L.C. Page 3
(Continued from page 2) XYZ is down to $10, I see no alternative but to sell enough interest rate to provide sufficient inter-
at a loss. vs. XYZ is down to $10, but the divi- est income to fund a reasonable lifestyle. It’s
years of my investing career. dend’s intact, so we’ll buy more shares at $10 difficult to live on the income when your assets
Probably the leading proponents of maxi- locking in a healthy 10% yield. This might just be are yielding 1 to 3% unless you’ve accumulated
mizing the power of money to compound are the most important advantage to our dividend a sizable pile of money.
Warren Buffett and his venerable side-kick strategy over a capital return focused strategy. Second, life expectancies have increased
Charlie Munger. It’s funny that even after years Individual investors are quite prone to selling in dramatically over the last 50 years. In 1950, the
of espousing the magic of money to compound an emotional panic when a stock they own gets average person barely made it to retirement
over long periods of time (and repeatedly noting hammered. The reality of the stock market is much less lived after the age of 65. Today the
the inability of the average investor to grasp the that even the best stocks are going to drop average life expectancy in almost 80. If we com-
concept), their investment success is often attrib- precipitously for no particular reason other than bine a much longer life expectancy with a more
uted more to the ability to buy “cheap stocks” the economy or the stock market hits a rough folks retiring in their 50s, many retirees today
than to any other factor. patch. Warren Buffett says that if you are not face a retirement of 30 or even 40 years. With
Obviously, the ability to buy stocks cheap willing to suffer through a 50% drop in the price of interests rates at 2-3%, and a longer retirement
helps the process of compounding. However, a stock, you shouldn’t be in the stock market at all. period it’s likely that many retirees face the
Buffett has often noted repeatedly that a cheap From our perspective, as long as the com- possibility of outliving their retirement assets.
price is just part of the process and the smallest pany has the ability and intention to continue to Our equity strategy is to designed to build
part at that. Buffett believes what really turbo- make its current dividend payment—never a growing stream of income from the start so
charges investment returns is buying a com- mind any increases—and the stock gets cut in that at retirement the income already covers
pany with growing cash flow that he can con- half in price, we jump at the chance to buy or retirement expenses with cash to spare. Not
tinually redeploy at the highest available return add to our position at twice the dividend yield. only that, but income continues to grow in
to maximize compounding. Our interpretation Again, as long as the company has the ability to retirement at a healthy annual rate so that you
of Warren’s rule is to buy stocks with a history pay its dividend, we’ll hold the stock. If the price can retire knowing that there’s the least amount
of growing dividends. We expect to add to gets whacked, we’ll use that opportunity to add of chance you’ll outlive your income. Even if a
client returns by taking redeploying a growing to our position to capture hefty yields. retiree needs most (or all) of the income leaving
dividend as the stock market’s volatility dishes Again, share price volatility is the friend to little after living expenses to reinvest, we still
up juicy dividend yields when it periodically, a dividend stock buyer. expect dividend income to grow 6, 8, 10 percent
and often indiscriminately whacks share prices. a year—well in excess of inflation—to provide
I need to grow my portfolio to X, convert it to growing income—for life.
Where is the stock market going this year? vs. We income producing assets and live off of the in- Having a growing income for life is an
don't try to predict short-term swings in the mar- come. vs. We invest for income and income ambitious goal to be sure. However, our experi-
ket. Believe it or not, we don’t try to predict growth from the start so you can retire and live off ence over the last ten years and the history of
short-term changes in the stock market. That is a growing income. The conventional strategy in the stock market leads us to believe we’ll be able
to say what the stock market will do over the portfolio management, going back as long as to achieve our goal of growing dividend income
next 12 to 18 months. Obviously, veteran read- I’ve been in the business (which seems to get a for our clients. The sooner you begin the proc-
ers of VIEWPOINT know we do believe that little longer with each passing year), is to save and ess of investing for dividend growth and rein-
long-term bull and bear market cycles are iden- invest for growth to accumulate as big a pile of vestment and the longer you have to allow the
tifiable and should to be heeded. At the same assets as possible while you’re working and can magic of high yields and double compounding
time, within the long-term market cycles are afford to take risks. In other words, “growth is from dividend growth and reinvestment to
some pretty volatile short-term swings—like the name of the game.” The conventional wis- work their magic, the bigger your annual in-
the 60% jump in stock prices since last March, dom being that growth stocks while riskier come will be when it comes time to retire. And,
as an example. But rather than shy away from than dividend stocks yet offer investors more may I suggest, the happier you’ll be sitting on
stocks when prices fluctuate, we see price vola- growth potential in order to accumulate a large your favorite beach collecting more dividend
tility as an opportunity to buy stocks when they a pile of assets as possible for retirement. income than you can spend in a year.
go on sale at unusually steep discounts. If you’re successful, then, as you began to Last, what value the stock market ulti-
approach retirement, you’d begin the process of mately puts on the stocks we accumulate over
I bought XYZ at $20 hoping to sell it at $30 vs. We converting your (hopefully) sizable pool of the next decade is anyone’s guess. We suspect
buy XYZ stock at $20 for its 5% current yield. In a “growth assets” into income producing assets. though, that the stock market will place a value
bear market cycle, buying stocks for capital Presumably, you’ll be able to sell your growth them at least as well as any portfolio of growth
appreciation is especially tricky. One problem stocks, and buy bonds at a high enough interest stocks we could buy.
with trying to capture capital returns is you’re rate to provide income to live on in retirement. When it comes to capita appreciation, way
never sure when they’ll appear—if ever. A stock It’s safe to say that over the last 10 or 15 year we look at it, any capital gains over the next ten
can remain undervalued for years. With a divi- that strategy has been repudiated for a couple of years be will like a nice thick layer of gravy on
dend stock, we’re pretty sure the dividend reasons. top of our growing big pile of dividend income.
check’s going to arrive in the mail every quar- For one, such a strategy is not functional Ok, so not the greatest of metaphors, but
ter. Occasionally, we even expect to get a bump now because with interest rates at an all time hey, by now you get the idea.
in our dividend payments, too. low, it’s simply not possible to lock in a high
PUBLISHER: MARK J. DESCHAINE EDITOR: JOHN H. DESCHAINE CONTRIBUTING EDITOR: TOM O’HARA STAFF CONTRIBUTORS: MATT POWERS, JASON LOYD COPY EDITOR: MARNIE E. DESCHAINE TECHNICAL ADVISOR: Joseph M. Deschaine. VIEWPOINT is a comple-
mentary publication of Deschaine & Company, L.L.C. a registered investment advisor in Belleville, Illinois. This information has been prepared from sources deemed reliable, but its accuracy is not guaranteed. It should not be assumed that any securities
discussed will be profitable or will equal past performance, or is it an offer to buy or sell any security mentioned. Deschaine & Company and/or one or more of its clients, employees, family or friends may have a position in the securities discussed herein. ©
2010. All rights reserved. Reproduction of this publication is strictly forbidden without written consent from Deschaine & Company. This issue was published on January 30, 2009. If you would like to receive a complementary copy each quarterly, simply send
us your address and the preferred method of delivery: snail-mail or email, to: 128 South Fairway Drive, Belleville, IL 62223 Or email us at mdeschaine@charter.net and we would be happy to add you to one of our mailing lists.

4. Page 4 Year End 2009 Viewpoint
Chart 1: Does the 2009 Stock Market Rally Signal the End of the Bear Market?
(The Dow Jones, S&P 500 Index and The NASDQ Composite Index from December 31, 1999 to December 31, 2009)
$1.30
Stock Market Returns Since 1999
$1.20 Dow Jones - 9.30
$1.10 S&P 500 - 24.10
$1.00
NASDAQ - 44.24
$0.90
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
Dec‐99 Dec‐00 Dec‐01 Dec‐02 Dec‐03 Dec‐04 Dec‐05 Dec‐06 Dec‐07 Dec‐08 Dec‐09
Dow - 34.52 87.20 - 52.98 57.36
S&P - 45.51 95.08 - 56.24 63.17
NQ - 71.99 146.13 - 53.88 75.38
(Continued from page 1) Of course, it’s one thing to get How good is the good news? We firmly
swept up in an emotional moment when believe that we’ll be able to lock in 7, 8, 9,
picking and choosing equity mutual voting for a president or for your favor- and even 10% dividend yields over the next
funds. Consider that in 2009, mutual ite American Idol, it’s quite another to ten years as stock prices continue to adjust.
fund investors overwhelmingly put their let emotion influence decisions about
money in foreign and emerging market money. When it comes to our own
equity funds while at the same time tak- money (or our client’s money certainly) we
But, Is the Bear Market Over?
ing out huge chunks from our domestic In order to make our case that we’ll be
like to think we base our investment
brethren. A quick look at the returns for able to grab double
decisions, as Dragnet Detective Joe Fri-
the mutual fund categories of 2009, we digit dividend yields “Stock market
day used to say: “on the facts mama, and
over the next ten
could assume investors made the right just the facts.”
years, we first have
volatility is bad
choice as international equity funds in At the same time, we’ll acknowl-
general—and emerging market funds in to debunk the view for the nerves
edge we’re not exempt from an occa-
particular—earned three to four times that the stock mar- for those unprepared
sional fit of cursing at an incompetent
the average return of US equity markets ket rally of 2009 for it. If you’ve done
CEO or slamming a fist on our com-
for the year. signals the end of your homework,
puter keyboard at the announcement of
the current bear
However, as history and last year’s a dividend cut. Nevertheless, we soon
market cycle. volatility is how you
mutual fund cash flows confirm, the regain our composure and remind our-
majority of fund investors plunked their We’ll start by make money in the
selves of what the facts tell us. And the
money into the emerging market equity facts today tell us we’re still a long way pointing to Chart 1, stock market.”
fund category because they were up 88%, from the bottom of the current bear above which out- — The Casey Report
market cycle. That’s the bad news. lines the returns for
not before they were up 88%.
The good news—and we really do the Dow Jones In-
In their defense, crowds are usually
mean this is good news and not some dustrials, S&P 500 index, and the
wrong because their judgments are
fabricated optimism to provide these NASDAQ composite from December 31,
based entirely on that most unreliable,
pages with some positive spin—as long 1999 to December 31, 2009.
yet entirely predictable human trait;
as we in a bear market, we’re going to Of all the information the chart
emotion. As any fan of Fantasia(2) or a
get multiple opportunities to buy our conveys, the most relevant from our
recently elected president can tell you,
favorite dividend stocks at higher and perspective, is the fact that the stock
that’s not a great way to ensure a good
long-term outcome when having to higher dividend yields all the way down
make important decisions. to the bottom of the bear market cycle. (Continued on page 5)
2) Fantasia Barrino, 2004 winner of American Idol.

5. Deschaine & Company, L.L.C. Page 5
400
Chart 2: Depression Era Stock Market Rallies, Foretelling the Future?
350
52.0%
300
Average Duration of Rallies: 11.3 weeks
%
19.0 Average % Increase: 52.6%
250
27.5% Current Market Rally: 40 weeks: Up 57.%
200 -49.4% -30.1%
27.5%
150 -37.5%
30.7% 122.5%
% %
-39.1 28.7
100 100.7%
%
Average Duration of Declines: 14.0 weeks -45.4
50 Average % Decline: 42.1% -41.4%
- 39.4%
- 54.9%
‐
(Continued from page 4) we do believe the economy’s in for a ket that remains “overvalued” by just
long slow recovery with high un- about any historical standard, will work
market by all three indexes is still down employment and “under-employment” to keep the stock market in a bear cycle
from year end 1999 levels. For the ten remaining for quite some time along for possibly another decade—or more.
year period ending 2009, the Dow Jones with the prospects of rising (possibly even We think the period from 1929 to
is down 9.3%, the S&P 500 index is hyper) inflation. That toxic economic 1933 illustrates how, during the worst
down 24.1%, while in the case of the combination, coupled with a stock mar- economic period in our country’s his-
NASDAQ composite, the 75% rise tory, the stock market staged multi-
since last March simply cut the stock Table 1: 8 Largest Market Rallies & Declines 1929-1933 ple and statistically significant ral-
index’s 10-year losses to a more mod- Beginning Ending Point Change % Change lies, all while dropping over 90%
Level Level in Period Period
est 44%. from its peak in 1929, before finally
386.10 195.35 - 190.75 - 49.4% hitting bottom in late 1932.
Lessons from Past Bear Markets 195.55 297.25 + 101.70 52.0% What we learned from the
Depression Era Rallies stock market experience of the
297.25 207.74 - 89.51 - 30.1%
For an additional perspective on how 1930s in trying to draw parallels to
the current stock market cycle might 207.74 247.21 + 39.47 19.0% the last 10 years, is that significant
play out over the next few years, we 247.21 154.45 - 92.76 - 37.5% rallies in long-term bear markets
can look back to the 1929 to 1933 154.45 196.96 + 42.51 27.5% are the rule not the exception, even
period. After peaking in 1929, the as the stock market makes its re-
196.96 119.89 - 77.07 - 39.1% lentless march to the bottom.
stock market struggled with a slump-
ing economy much like the one we 119.89 156.74 + 36.85 30.7% Suggestion: Learn to appreci-
find ourselves in today. (See Chart 2, 156.74 85.51 - 71.23 - 45.4% ate price volatility, it’s an everyday
above.) reality of the equity investing equa-
85.51 119.15 + 33.64 39.3% tion. Better yet, make volatility
First, do we believe the econ-
omy’s in a depression the magnitude 119.15 69.85 - 49.30 - 41.4% your friend by being prepared and
of the Great Depression of the 1930s? 69.85 89.87 + 20.02 28.7% taking advantage of it to buy your
In a word, no, primarily because we favorite dividend stocks during the
89.87 40.56 - 49.31 - 54.9%
don’t believe unemployment is likely many periodic stock market swoons
to reach anything near the 25%, like it 40.56 81.39 + 40.83 100.7% that are certain to come our way
did in the early 1930s. Nevertheless, 81.99 49.68 - 32.31 - 39.4% over the next ten years.
(Continued on page 6)
49.68 110.53 + 60.85 122.5%

6. Page 6 Year End 2009 Viewpoint
Chart 3: Is the S&P 500 going to follow Japan’s 1989 to 2009 experience?
5.00
4.50 The S&P 500 from 1999 to 2009
4.00
3.50
3.00
2.50
2.00
1.50
1.00
The Nikkei Index from 1989 to 2009 ?
0.50
‐
Dec‐89
Dec‐90
Dec‐91
Dec‐92
Dec‐93
Dec‐94
Dec‐95
Dec‐96
Dec‐97
Dec‐98
Dec‐99
Dec‐00
Dec‐01
Dec‐02
Dec‐03
Dec‐04
Dec‐05
Dec‐06
Dec‐07
Dec‐08
Dec‐09
Dec‐10
(Continued from page 5) over an extended period of time in order to a level where they need to be to be
to re-established historical P/E aver- considered bear market bottom. We’ll
ages. That basic understanding of statis- need to see average P/E ratios like 7 or
Seeing the Future but for the Past tics, we’ll acknowledge, is a long way 8 times earnings and average dividend
While we profess to be able to foresee from forecasting with any precision how yields in the 6 or even 7% range for the
the stock market’s future, (with a rela- long it will take for prices to adjust to stock market before we’re prepared to
tively high degree of certitude, no less) we their averages or how much prices will call a market bottom.
should clarify that we’re only able to do bounce around in the process. How long do we think it’ll be before
so on the general direction of the stock Studying other bear market periods, we reach such valuation levels? How
market’s long-term trends. gave us a good indication that it could about another decade? Oh, and just so
For example, in 2000 with stock P/ be as long as 15 or 20 years for prices to you know, once at we reach a market
E ratios around 40 (an all time high, by fully adjust. Why? Because historically, bottom, the stock market has a nasty
the way) we were certain that stock the length and duration of the bear mar- tendency to languish at the bottom for a
prices would have to go down just to ket cycle tends to mimic in reverse the lengthy period beyond that.
bring P/E ratios in line with their his- length and duration of the bull market
torical averages. We also surmised that that preceded it. Since the 1982 to 2000 The Japanese Experience 1989 to 2009
such an adjustment could take years. bull market lasted about 18 years and You can’t be serious. Another decade of
How did we know? Well for starters reached unprecedented heights in valua- declining stock prices? Is that possible?
forecasting such a trend didn’t require tion, we figured the bear market would If the last decade hasn’t convinced
much more than recognizing what stat- be equally as long and possibly equally you that stock markets can suffer long
isticians refer to as “regression to the unprecedented on the downside. down cycle for stock prices maybe
mean,” a fancy way to say that when Here we, are 10 years later and the Chart 3, above will do the trick. Chart
data gets way out of whack with its long stock market has pretty much played 3, compares the S&P 500 from 2000 to
-term historical averages, the data must, out as we anticipated in the spring of 2009 to the Nikkei index, the Japanese’s
at some point, move in the other direc- 2000. Since 2000 P/E ratios have been stock over the 1989 to 2009 period.
tion of time in order to “re-establish” cut in half—more or less—and dividend As you may know, Japan went thor-
long-term historical averages. yields have more than doubled from a ough a similar credit and real estate
It didn’t take much than that basic record low of .90% to about 2.40% as of bubble in the late 1980s. Financed by
understanding of statistics to come to year end 2009. (See Chart 4, on page 7.) easy credit and low interest rates, (sound
the conclusion that starting in 2000, Where we sit today, both P/E’s and
stock prices would have to drop (a lot) dividend yield are only about half way (Continued on page 7)

7. Deschaine & Company, L.L.C. Page 7
7.00
Chart 4:
S&P 500 Month End yield: 1965 to 1982 6.23
(Dividend yields during the last bear market) 6.00
5.68
S&P 500 Month End yield: 2000 to 2009 5.37 5.40
5.00
4.20
4.52
3.73
4.00
3.60
3.65
3.00
2.90 2.88
2.67
1.92 2.28
Our equity portfolio strategy for the coming
2.00
decade? Buy stocks has dividend yields rise
1.56 all the way to top of the dividend yield cycle.
1.00
1.17 Just like we’ve been doing since 2000!
‐
1965‐07
1965‐12
1966‐05
1966‐10
1967‐03
1967‐08
1968‐01
1968‐06
1968‐11
1969‐04
1969‐09
1970‐02
1970‐07
1970‐12
1971‐05
1971‐10
1972‐03
1972‐08
1973‐01
1973‐06
1973‐11
1974‐04
1974‐09
1975‐02
1975‐07
1975‐12
1976‐05
1976‐10
1977‐03
1977‐08
1978‐01
1978‐06
1978‐11
1979‐04
1979‐09
1980‐02
1980‐07
1980‐12
1981‐05
1981‐10
1982‐03
1982‐08
(Continued from page 6) market, cycles that the current bear
Given the similarities in Japan’s
economic experience in the 1980s andmarket will remain intact and be the
familiar) Japanese investors went on a our own over the last decade—and ourdominate variable in our outlook for
buying binge in the 1980s. stocks until P/E ratios across the mar-
government’s eerily similar response to
At its peak in1989, a square foot of ket, settle into single digits and divi-
our credit bubble as the Japanese took to
downtown Tokyo sold for over dend yields, again for the market over-
theirs—we believe our US stock market
$250,000 and the Nikkei, Japan’s stock could be in for a similar experienceall, average 6% or higher.
market index, reached a hyper-inflated which would mean another decade, or Note: we temper our certainty on
39,000. In many ways, Japan’s 1980s more, of slumping stock prices. the long-term trend knowing full well
credit bubble equaled or surpassed our that the market can fluctuate wildly in
own loose and cheap credit fueled real Looking Ahead to 2020 the short run at the same time its con-
estate and stock market bubble from Just to reiterate, if we express any level tinues to trend down over a long period
2000 to 2008. of time. As chart 4, demonstrates, divi-
of certainty in our forecast it’s related to
As Japan’s credit and real estate the long-term trend in stock prices. That dend yields bounced all over the place
bubble burst in early 1990, the Japanese is not the same as suggesting we can tell during the1966 to 1982 bear market
economy fell into a protracted economic what’s going to happen to prices over while dividend yields went from a low of
slump that it has yet to recover from. As the next six months or even the 2.9% in 1966 to 6% in 1982.
the economy tanked under the burden of next year. Dividend any This points out the risks in
investment strategy. Even
excess debt and real estate prices col- Yet, we’re convinced, based
lapsed, stock prices naturally followed on our interpretation of multiple Yields Go though the long-term trend may
suit and as chart 3 on page 6, shows, UP be predictable, short-term volatil-
they have yet to recover. ity can cause havoc on even the
As we write this, the Nikkei best laid stock market strategy, espe-
Index is trading at about 10,500 When Stock The advantage to a high-yield cially if we allow ourselves to get
which means the index is down strategy in down markets caught up in the emotion of the mo-
more than 70% from it’s all time Prices Go ment. It is our job to guard against such
high of 38,850 in 1989. That’s a DOWN a possibility by doing everything in our
high set over twenty years ago. power to let cold facts and dividend
Meanwhile, Japan’s economy has shown yields to guide us.
no signs of any of a meaningful eco-
(Continued on page 9)
nomic recovery anytime soon.