December 11, 2007

2007 Draws to a Close, A Year of Solid Gains in Core's Portfolios

Despite all the bad news, US stock market averages are higher this year. Core's portfolios have done far better than the broad market

...both because of what we own
and what we do not own.

As the year draws to a close, one can only be rather surprised that the major US stock market averages are in positive territory. The S&P 500 is ahead by about 7% for the year as of this writing and stands only a few percent below its all time high set in early October. The collapse of credit markets, ever higher rates of foreclosure in the US housing market, the dramatic decline in the value of the dollar, growing fears of a recession in the United States, crude oil prices above $90 per barrel-- these do not seem like the ingredients for strong financial markets.

However, despite these real problems and two severe rounds of selling engendered by the subprime crisis, equity markets have demonstrated a readiness to rally whenever hope can be discerned.

Core's portfolios have been much stronger than US markets, and have avoided the worst of the selling during the bad spells. Our long-standing investments in foreign money market funds and international stock markets have appreciated in value as the dollar has declined. Similarly long-held investments in oil-related securities, in utilities, and in commodities have thrived in this environment. It has helped, as well, that we have had essentially no investments in banks, mortgage-lenders, home builders and other sectors that have suffered the most this year. As a result, we are winding up a year in which our investment returns have been very healthy, indeed.

The bursting of the housing bubble in the United States has given rise to all this havoc. The bubble inflated for a period of years. It may take more than a few months for its baleful effects to work through the system. This week began with UBS, the gigantic Swiss bank, announcing another $10 billion of losses from its holding of ill-fated US mortgages. Last week's news involved the negotiations among the US Treasury and mortgage lenders to freeze the low teaser rates for a period of years on certain adjustable rate mortgages. Whatever arises from the Treasury's plan will not be a magic wand. The numbers of mortgages scheduled for resetting is on the rise and will peak in the midst of next year's presidential election. There will be more market disruptions, more enormous losses by banks, more people tossed out of homes, and more political pressure to take action. It appears now that 2007 will probably end quite well in the markets, but there will be more volatility and more selling before these problems are laid to rest.

We have not had the last of the bad news from the bursting housing bubble.

We will continue to invest cautiously and to be alert to lowrisk investment opportunities.

As in investment matter, we plan to maintain our major investments that have served us so well in the last few years. We expect to maintain ample cash reserves both to protect our capital from uncertainties that lie ahead and to enable us to make new investments as we identify low-risk opportunities.

A Note of Thanks

We at Core are very grateful for the opportunity you have given us to work with you. We enjoy our individual contacts with you and the sense that our work for you is helpful to you and your family. For me, the investment process is endlessly fascinating and I consider myself enormously lucky to be able to pursue this interest as a business. The intellectual challenge of investing is stimulating and absorbing. When our work provides good results without significant risk, as has been the case in recent years, we have a real sense that our work is useful, as well as interesting.

We wish you a warm holiday season and offer our hopes for a peaceful and prosperous year in 2008.