Alan had a droll wit and regularly directed heavy doses of sarcasm toward purveyors of Wall Street's common wisdom. He recognized and criticized the tendency of investors and advisors alike to fall in love with whatever had been moving aggressively upward. And he wielded an especially derisive pen toward marketers of securities products with unsound valuations. Those who read Alan's columns over the years came away with a comprehensive understanding of sound investing principles.

Relatively early on in my investment career, I had the good fortune to get to know Alan. Having founded Marathon Asset Management Co., now a part of Mission Management & Trust Co., in the mid-1980s, I was in my first years as a Registered Investment Advisor. Alan came across one of my articles and published it in Barron's. Writing essentially for Marathon's clients, I was surprised that my work had attracted the attention of one of the preeminent scribes in the world of financial journalism. Only later did I learn from others far more familiar with the difficulty of getting published how fortunate I was to have been published nationally early in an investment career and without a publicist.

I met Alan only once in his New York office, but we interacted by phone from time to time. He quoted me in his column occasionally, once sent a photographer and interviewer to my La Jolla office and even saw fit to put me on Barron's cover page one week. His belief in the president of a young company lent Marathon a credibility that helped us to grow. It is with appreciation, respect and sadness that I note his passing.

Economic conditions throughout most of the world continue to deteriorate. Europe's recession is deepening. Emerging countries that have led the world recovery since 2008's crisis are slowing perceptibly. Japan's economy remains in the doldrums. The U.S. is experiencing its most sluggish recovery since World War II. Sluggishness prevails despite world central bankers pumping far more new money into the banking system than ever before. Despite years of aggressive stimulus, economies are not picking up steam. In fact, recent economic deterioration has provoked central bankers to even more virulent stimulus.

Most of the world's major stock markets have performed poorly this year. The two striking exceptions have been the U.S. and Japan, whose central banks have each committed to unlimited quantitative easing. Aggressive stimulus has not revived their economies but has powered their stock markets. That divergence will not go on indefinitely. The open question is whether the economies will pick up or whether the stock markets will falter. The failure of stimulus elsewhere argues against the likelihood of economic revival, but it's not impossible. Multi-century history similarly suggests that it's unlikely that major nations will be able to print their way out of debt crisis without considerable collateral damage. Mission's new equity allocation processes recognize the difficulty that faces the Fed, yet present opportunities to benefit should market strength continue, without assuming the risks that a permanent equity position presents.

The picture is similarly unattractive on the fixed income front. The Fed has directed its stimulus effort toward driving interest rates as close to zero as possible. That endeavor has provided artificially strong bond market returns for years. Rates on most fixed income securities are now at or close to all-time lows. While the Fed continues its commitment to hold rates near rock bottom for the foreseeable future, a growing chorus of critics is arguing that the unintended consequences of the policy will outweigh its benefits. Some of those critics come from the ranks of Fed governors themselves. Virtually all fixed income analysts agree that interest rates will rise from these levels sooner or later, doing damage to prices of all fixed income securities except those with the very shortest maturities. To earn anything more than a minimal interest rate return, rates must decline even further. While that remains possible, despite already historic low yields, the potential losses from rising rates far exceed the potential rewards from declining rates. Slightly rising rates in the first quarter led to losses on longer maturity fixed income instruments. Such losses could become far more severe should rates rise more aggressively.

As a hedge against the long-term inflationary effects of excessive money printing, we have held a small gold position for several quarters. As we have said throughout that holding period, there is no way to compute an "appropriate" gold price based solely on fundamental factors. Gold's price is primarily determined by investor sentiment. We acquired a 3% gold position in late-2011, indicating at that time that we would add to that position only if prices declined further. Prices instead rose. When it appeared that gold prices were unlikely to break to new highs, we scaled back by taking profits on part of that position near gold's 2012 high prices. Declining gold prices took a little out of first quarter performance. We will build a larger position if the current decline continues, especially if prices move significantly lower.

The year ahead will likely present a great many twists and turns. Most critical will be whether or not investors retain the belief that central bankers are capable of overcoming deteriorating economic fundamentals. Governments have been winning that battle over the last few years, but risk levels remain extremely high.

The dominant news item this week is that Cyprus has reached the point of no return without a financial rescue. By itself, the failure of such a tiny economy would have virtually no effect on the broader world economy, notwithstanding the tremendous pain inflicted on direct creditors of the government or the country's banks. Cyprus's economy is roughly the size of Vermont's. How this local crisis unfolds, however, could have far wider repercussions.

The banking system in Cyprus is far larger relative to the size of the economy (about eight times) than comparables in the rest of the world. The United States banking system, for example, is about the same size as the country's GDP. Cyprus's banks bet heavily on Greek debt, trusting that rescues ultimately would produce big profits. On the contrary, losses were huge when Greek debt was restructured.

Eurozone monetary authorities have proposed a rescue plan, but have insisted that Cyprus's banks bear a sizable part of the financial burden. The initial plan, since rejected by the legislature, was to tax bank deposits up to 100,000 euros at 6.75% and above 100,000 euros at 9.9%. Depositors both large and small screamed at such confiscation, especially because-at least at the lower level-deposits had been guaranteed, much as deposits in the United States are guaranteed by the FDIC.

Russia is expressing heavy displeasure, its citizens having deposited an estimated $12 billion in Cypriot banks. Many in the Eurozone suspect that much of that money may be the product of "Russian Mafia" activities. Understandably, that suspicion lessens Eurozone members' willingness to contribute to a bailout.

Unable to deal with the problem expeditiously, Cyprus has closed its banks until at least next Tuesday. A primary concern is that open bank doors might lead to runs on the banks. An even greater concern throughout the Eurozone is that depositors in financially challenged larger countries like Spain and Italy might begin to pull assets out of their domestic banks. In an already precarious financial situation, the last thing heavily indebted countries want to see are pictures on the nightly news of lines of scared depositors streaming down the sidewalks outside major banks. Such fears can become highly contagious.

Following the rejected tax on depositors, several proposed solutions have emerged, including tapping public pension funds. There is no clear Plan B. Hope remains strong, however, that the other members of the Eurozone will ultimately pony up needed rescue money, rather than allow Cyprus to drop out of the 17 nation monetary union.

It is not at all clear which is the more powerful force: antipathy of Eurozone members toward providing more rescue money or fear of unknown consequences should Cyprus have to leave the union. Should they leave, revalue their old currency and begin to recover, there could be a parade of others-led by Greece-that start down the same path.

While acknowledging that Cyprus's default would barely register on the world financial scale, my first reaction was that this could be today's version of the assassination of the Archduke Ferdinand, which line I used at a meeting yesterday. I thought it was a clever analogy until I heard two others use it today on financial TV. Let's instead wonder whether Cyprus could be the canary in the coal mine.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

After reviewing many decades of fundamental stock selection criteria, I put together a formula incorporating several measures that have over the long term identified stocks with strong potential of outperforming major stock market indexes. These measures are all valuation-based and have served us well for most of the past 27 years. Since the January 1, 1986 inception of the equity selection process through December 31, 2012, all the stocks we have owned produced an annualized return of 16.9%. Over the same period of time, the S&P 500 returned an annualized 9.9%. That big a difference in equity-only performance is almost unheard of. In fact, one investment consultant told us that she would have ignored our numbers had Mission not been verified by one of the national firms that authenticated Mission's compliance with Global Investment Performance Standards (GIPS®).

Notwithstanding that stellar equity selection record, we have spent the past few years researching a new method to expand our equity allocation. Several years ago, the Federal Reserve began to dominate the securities markets with unprecedented money creation and massive direct securities purchases. Their actions produced a situation in which very few companies exhibited the attractive fundamentals that had been prevalent in prior decades. As a result, very few companies met our strict valuation-based selection criteria. Because there is no way to know how long the Fed will be able to dominate the markets, we felt compelled to find an additional way of identifying opportunities for profiting from equities without forfeiting the defensive characteristics that have always typified Mission's portfolio management style.

Over the past year, we have found and back-tested a very broad collection of measures and studies that, in the aggregate, have outperformed the S&P 500 with fewer and smaller losses than that index has experienced over the past 32 years. True to our belief that successful management requires the elimination of ego and emotion from the investment process, we have built these data into two formularized investment processes. We have begun to offer them to those clients who want to increase the potential for profitable equity exposure while still retaining considerable protection against significant losses.

These newer approaches differ from our traditional valuation-based equity selection process primarily in the time frame in which data are measured. Our traditional process assesses valuations over the full scope of market history. And we are strong believers in reversion to historical means. The two new processes measure data over short to intermediate time frames, using moving averages and volatility bands.

We evaluate a broad collection of data in such major categories as: money supply, interest rates and direction, availability of funds for investment, inflation, Federal Reserve stance, advancing and declining stocks, investor optimism, valuations, new highs/new lows, economic conditions and stock earnings yields. Most importantly, we give heavy weight to stock price direction and stock price momentum. Especially in an era of Fed dominance, heavy weighting of price activity prevents remaining too long in a position supported by fundamentals, yet contradicted by price action. That weighting has been integral to preventing substantial losses over the 32 years of back-testing.

The objective of each process is to outperform the S&P 500. The 2-mode process is designed to own stocks when equity markets are advancing and to keep assets safely in cash equivalents when markets are declining. The 3-mode process attempts to provide a positive return in both rising and falling equity markets. It attempts to own stocks in the most attractive market environments, to keep assets safely in cash equivalents in uncertain market environments and to short stocks in the weakest market environments.

The following table provides a picture of the two formularized processes' performance history over the past 32 years from January 1981 through December 2012.

* Trading costs are not included.

There can, of course, be no certainty that what has worked very successfully for 32 years will continue to perform as well in the future. We expect, however, that there is a strong probability of continued success for three primary reasons: 1) the success of the formula was quite consistent over nearly a third of a century and not simply due to a few periods of significant outperformance; 2) the data studied are numerous and diverse, reducing the potential that a few measures becoming less well correlated with future stock market progress will substantially reduce the effectiveness of the formulas; and 3) the heavy weighting of price direction and price momentum has quite effectively prevented staying too long in a position recommended by fundamentals, but which is performing badly.

By applying these data in historically tested formulas, we are removing the destructive forces of ego and emotion from the decision-making process. In an era in which central bankers have done serious damage to time-tested valuation measures, we are confident that these new approaches will allow us to seek returns from equities without sacrificing important protection against significant losses. And that protection could still be critically important with our Federal Reserve and other world central banks increasing debt levels as though there will be no negative consequences.

Please contact us if you would like additional information about the processes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Thanks to Richard Russell, long-term publisher of Dow Theory Letters, for a quote from Ernest Hemingway: "The first panacea for a mismanaged nation is inflation of the currency. The second is war. Both bring a temporary prosperity. Both bring a permanent ruin. But both are the refuge of political and economic opportunists."

Richard, now well into his 80's, is an old friend from La Jolla, California. Back in the early-1980's he was one of the guest speakers at our annual client conference, followed over the years by such economic and market heavyweights as Marty Zweig, former Federal Reserve Governor Martha Seger and "Irrational Exuberance" author Robert Shiller. Richard is still an eclectic reader and his experience makes his insights worthy of attention. Very much in concert with my beliefs is the following excerpt from his February 7 commentary:

The Fed is printing like mad in an effort to keep the economy "above water." If so, you ask, "then why aren't interest rates rising?" I've stated that the Fed can continue to print until the bond market "says it can't." Then, you ask, what's holding the bond market up?

Here again it's the Fed. The Fed is buying $85 billion worth of bonds a month in its game of not allowing bonds to decline and not allowing interest rates to rise. The whole manipulated situation has forced investors to move into the stock market. The current low VIX demonstrates that option traders don't perceive any danger while the Fed retains control and while the Fed continues its manipulations.

Corporate earnings remain good and dividends continue to be paid. As I see it, there's no timing the situation. My belief is that we're building a speculative and manipulated edifice like no other that I've ever seen. At some point the edifice, with literally no warning, will topple over. At that point, we may see one of the worst crashes in stock market history. At that point, an angry crowd will turn against a chagrined Fed, and a new monetary system will have to be created.

The underlying question is whether central bankers can create wealth by essentially printing money. Never in my 44 years of investment experience have so many central bankers pledged their troth to the common cause of cheapening their respective currencies. Since there is no acknowledged standard of value, currencies measure their strength or weakness against one another. It should be obvious that all currencies cannot be weakened simultaneously without substantial inflation. Right now, the still powerful force of deleveraging at the consumer level is suppressing that tendency toward inflation. That suppression fosters an unstable equilibrium. When central bankers last behaved similarly - in the 1930s - currency wars and trade wars exacerbated the Great Depression. Such experiences could be in our future.

I saw a CNBC interview yesterday with Fed Governor Charles Evans, a leading advocate of aggressive money printing. Admitting that current Fed policy is experimental, he characterized it, not as a marathon, but rather as a half marathon. Carrying his metaphor further, he indicated that the Fed has loaded the economy with carbohydrates and "energy bars."

Having run a couple of dozen marathons--even one ultra-marathon--back when my knees and other body parts were far more tolerant of 50-to 100-mile training weeks, I can attest to the inadvisability of attempting even the half marathon distance without sufficient training. Weaknesses in body parts you didn't even know you had start screaming for attention when a runner ventures into distances not properly trained for. Over the decades, the Fed has metaphorically run a few 5K and 10K races, and their healthy recovery record from those has been spotty at best.

The Fed's acknowledgement that the current policy is experimental is a frank admission that they haven't trained for this distance. They don't know what possible difficulties await them when they get past the 10-mile mark. Their singular inability to promote even a historically normal economic recovery despite unprecedented stimulus is clear testimony to the difficulty of this race course. Their biggest surprise could still lie ahead of them.

Fiendish race directors may not place a finish line at the 13.1-mile mark. Instead, they may demand that the Fed keep running. Having not even prepared properly for a half marathon, the Fed may be forced to proceed toward a more distant target. The potential for serious damage to the system grows exponentially as the course lengthens.

I don't know if Fed Governor Evans is a runner or not, but his analogy may be very apt, and even a half marathon may reveal weaknesses that the Fed doesn't yet appreciate.

One last item from this week's news. CNBC this morning featured an interview with Rachel Fox, a 16-year-old actress with a part in Desperate Housewives. She acknowledges her off-screen activities to include day-trading stocks. While she is both intelligent and well-spoken, you can just imagine how much experience she brings to her financial endeavor. This tale evokes recollections for anyone with a memory of the excesses at the two prior stock market peaks in this still young century. I read (but don't recall where) another comment about this story: "Be afraid. Be very afraid."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Nothing comes free, however. To prevent potentially severe recessions, central banks resorted to unprecedented policies which raised debt levels to heights that have typically led to history's greatest economic collapses. Even fellow central bankers have warned that these actions risk painful economic consequences that could last for a decade or more.

Especially following successful Federal Reserve stimulus efforts, the phrase "Don't fight the Fed" often becomes the rationale for abandoning all caution and going with the flow. And conceivably, that abandon could be the roadmap for success in 2013. But investors would be wise to evaluate the risks as well.

While the Fed succeeds more often than it fails, it has some glaring episodes of ineffectiveness on its resume. In the United States' most serious stock market collapses (1929-32, 2000-03, and 2007-09), the Fed aggressively attempted to bolster asset prices. Having finally run out of interest rate tools, the Fed and the European Central Bank have of necessity resorted to unparalleled levels of money printing. In 2013, stocks could continue to rise if investors retain their confidence in the central bank's ability to support markets. But today's debt levels also present unprecedented risks. Confidence could dissipate quickly, and markets could fall rapidly. That puts great question marks and uncertainty around investments in the year ahead.

Mission's longstanding equity selection process is built on valuation fundamentals. Since 1986, it has selected equities that have on an annualized basis outperformed the S&P 500 by about 700 basis points. In recent years, however, in which the Fed has dramatically altered free markets, our process has found very few equities meeting our traditional selection criteria. Consequently, we intensified our search for an additional approach that would retain Mission's carefully designed risk controls but would also be responsive to an environment dominated by central bank stimulus. In our third quarter commentary I referred to two new equity allocation processes that we were prepared to initiate. Back tested for more than three decades, each has outperformed the S&P 500, while suffering fewer and smaller losses than that index. We invited clients with interest in exploring these alternatives to contact us. Many did, and we have held several small group sessions to outline the processes and to respond to questions. Most have chosen to add one of the new alternatives to their investment program.

While these new approaches are not designed to replace our time-tested traditional process, they have the potential to supplement that process in a period of artificial central bank stimulus. We encourage all clients who want equities as part of their investment program to evaluate these processes. We will continue to schedule small group meetings to review details. Let us know if you would like to attend.

We continue to believe that while the Fed could still drive interest rates lower, thereby producing small profits in bond portfolios, there remains greater risk in the bond market than probable reward. Central bank money printing will eventually produce inflation, although its timing is subject to a number of uncertain variables. We have begun to build a position in gold as a hedge against eventual inflation. Because short-term gold prices are based more on investor emotions than fundamentals, we are not inclined to chase prices. We will continue, however, to build that position should prices decline.

We anticipate that great uncertainty and volatility will mark the year ahead. If central bankers win their historic bet on more stimulus, markets could continue to rise. If deteriorating fundamentals overwhelm central bank largesse, security prices could fall precipitously, as they have twice so far in this new century. Investors should remain flexible and avoid fixed allocations to either stocks or bonds.