Keeping the Powder Dry.

Given the events of the week, and it's still only Tuesday, there appears to be a need for dispassionate words of reason. Well, instead, you'll get mine.

The main thing thing to remember is that, in the long history of financial markets, there has never been a crisis so grave that no opportunity can come of it.

We know that financial markets are fueled by fear and great, or, in the extreme, panic and irrational exuberence. Panic, which most investors would agree describes the current state of the market, is what compels investors to sell not necessarily from loss in confidence of that which they are selling, but primarily from fear of loss of capital resulting from the selling of others.

I have had queries from clients concerned over the fact that their Castlemoore-managed portfolio has in it a security bearing the name ISHARES LEHMAN 20+YR TREAS., not withstanding the fact this is one of the very few things being traded on any exchange that's making money these days. Obviously, the LEHMAN reference has some clients spooked.

What this security is is an Exchange Traded Fund, managed by Barclays Bank, designed to emulate the performance of a particular index, in this case the Lehman Long Term Treasury Bond index. In other word, this ETF invests in long-term US government Treasury Bonds, and during time of crisis, there is always a "flight to quality," ie T-bonds, thus accounting for the ETFs strong performance this week.

Lehman is the firm that created and maintains the index, and the relationship ends there. It is the same thing in principle to the more famous Dow Jones Industrial Index, created and maintained by Dow Jones & Company. Were the latter to run into financial difficulties, they would not impact the index itself, inasmuch as the company itself is not a component of it.

I can't say with any certainty when the crisis will end, but it will eventually, and it will leave in its wake many stocks and companies selling at bargain basement prices. At Castlemoore, we are largely in cash, waiting....

Sheldon Liberman
Portfolio Manager
Castlemoore Inc.

http://www.castlemoore.com

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