Market

Insights

After one of the wildest weeks in the history of investing, we feel it is not necessary to try to re-hash the causes of the volatility. We do think it is necessary to reiterate that while the particular circumstances of financial crisis invariably differ, the outcomes tend to be fairly similar. In sharp market declines, bottoms usually are punctuated by panic selling. We think if this past week didn’t fit that description, it was very close. Federal, and in this case, world governments responded aggressively to the crisis. During this period, business’ and even banks fail in the process. This is a normal and healthy part of business. As illustrated in the graph below, stocks eventually reverse course and the economy and confidence improves.

At the most volatile and fearful leg of an investment cycle, an investor is left with two choices: a.) Liquidate equity positions and move to interest bearing CD’s or money markets in an attempt to stop the bleeding, or b.) Look at your portfolio for diversification, and if adequate, maintain your position and wait until the panic recedes and attention turns back to market fundamentals.

Every time our Congressional leaders get a chance to show they can work together for the good of the country they find a way to screw it up. Yesterday, both parties failed to hold up their part of the vote for a package to ease the banking credit crunch. Between the biting partisan speech that Speaker Nancy Pelosi gave on the floor, and the childish republicans changing their votes in protest, our so-called leaders demonstrated again where their interests lie. Many are more concerned with their re-election. Of the 18 congressional incumbents that are in close races this November, only 3 voted for the proposal.

For the second time this decade, a major cleanup of corporate mismanagement and greed is in the works. In 2002, it was the accounting scandals that destroyed household names like Arthur Anderson and Enron. Today the mismanagement of risk and the allure of short-term gains has taken the 158 year old Lehman Brothers firm, Merrill Lynch, and possibly AIG Insurance Company.

Recently, our research into stock and bond markets’ performance with respect to mutual fund cash flows produced some interesting results we thought to share with you. Simply put, mutual fund inflows are when people buy the funds and conversely, outflows are when people sell. The accompanying chart is a 10 year graph of the S&P 500 Index and Lehman Brothers Aggregate Bond Index through the end of July 2008.

Diversify your 401(k) plan. You have heard it before, but we will say it again. Don’t leave too much money in your company’s stock, or any stock for that matter. Studies continue to show that employees are letting their 401(k) plans remain overly concentrated in their company’s stock.

The Advisor - Summer 2008

The American Association of Retired Persons (AARP) has recently reported that lenders offering reverse mortgages are abusing consumers. Homeowners using reverse mortgages borrow against the equity of the house and receive payments from a bank. The loan is repaid with interest when the house is sold or when the borrower dies. The report found that although nearly 50% used the proceeds to pay down home equity debt, a whopping 38% planned on using the payments for extras. Consumers should be very wary of anyone attempting to sell them something and suggesting they use a reverse mortgage to pay for it.

The Advisor - Winter 2008

The bottom line again is greed taken to the extreme. Suffering this time will not be limited to the pros or the wealthy. Ordinary investors, who got sucked into the frenzy of the private equity plays, or even junk bond mutual funds, will feel the pain before this is over. We feel that quality investments with good business models will come through this emotional upheaval well and will actually attract money as it moves from investors fleeing the current trouble sectors.

The Advisor - Summer 2007

Near term there are concerns of the higher risk sub-prime market imploding if interest rates keep rising. The financial sector , which has enjoyed an exceptional fun over the past few years, looks to be near the end of its run. Financials now make up 20% of the S&P 500 Index and have held the top spot longer than any other sector. Its cycle is most likely nearing the end.

Continue to invest regularly while trying to avoid the negative media and we will continue to identify exceptional managers and guide you towards your goals.

The Advisor - Winter 2006