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Last year’s annual report ended with a question: “Is this 1995-1999 all over again, the last time the Fed ended a series of interest rate hikes? Or will the markets finally surrender to historical precedent? Our job is to identify the real trend – early – ahead of the crowd.” Well, we were certainly “ahead of the crowd.” This is by far the most defensive we have ever been, and the longest period we have gone without a market move. But the key question has finally been answered: The DJIA has declined 2,065 points (-15%) from its Oct 9th 2007 closing high of 14,164.53. The S&P 500 has declined 240 points (-15%) from its Oct 9th 2007 closing high of 1,565.15. And the Nasdaq has declined 519 points (-18%) from its Oct 31st 2007 closing high of 2,859.12. Our interim reports didn’t just say the markets were due for a correction. We declared flatly that this is the “highest risk market we have seen since Q1 2000.” In 2007, the markets experienced severe downturns in February, August and November. The first was the “carry-trade” shakeout, which lasted just a month. The August meltdown was much worse, when “sub-prime” fears finally went mainstream. At the mid-August low, just 30% of stocks stood above their key 200-day moving averages – the lowest reading since October 2002. Many analysts believed the August correction had formed a major market BOTTOM; that problems stemming from the mortgage crisis and ensuing credit crisis were now fully “priced in.” We strongly disagreed. Emergency action by the Fed (3 rate cuts amounting to a full percentage point), an announced sub-prime bailout by Treasury, and understated “write-downs” by the major banks stopped the bleeding, but only temporarily, and only enough to cloud the investment horizon. In what will go down as our best decision of 2007, we firmly resolved to “Fight the Fed” – a decision that was met with more than a little frustration. History was certainly against us: only two other times have the markets dropped more than 10% in the six months after a 3rd Fed rate cut – once in 1930, during the Great Depression, and again in 2001, when the dot-com bubble burst. In both cases, the rate cuts failed to cushion the economy from a recession that was already underway. The outcome for many investors will be the “dark-side” of Federal Reserve intervention: a severe whipsaw that saw them chase artificial gains through October, only to see the collapse begin in November once the fundamental rifts in our economy began to take hold. Having already experienced short-lived declines in February and August, selling early into the November decline would defy human nature. This is how markets work so deliberately to separate investors from their money. The closing highs achieved by the DJIA, S&P 500 and Nasdaq in October 2007 most likely formed a long-term market top. If historical precedents hold, we will not regain those highs for 12-18 months. Consequently, the decline that began in early November 2007 is the beginning of a relatively severe bear market that, at the very least, should return the indexes to their 2006 lows: 10,700 for the DJIA, 1,230 for the S&P 500, and 2,020 for the Nasdaq. Despite the gloom, there are good reasons for encouragement. We are once again fully in sync with the markets, and we will remain in sync (much has been learned over the last 12 months). We are never hesitant to call significant turning points: the market top in this report, and the October 2002 market bottom (way back in January 2003), when most investors were still heading for the exits. BCN Advantage clients are now positioned to take advantage of the coming capitulation and washout – because we have patiently and steadfastly maintained our cash reserves.