Market Update

Markets are once again testing their lows and every investor’s resolve and patience. Economic conditions in some areas have improved, but in most areas continue to decline. The deterioration in the economy will be increasingly evident over the next few quarters in the unemployment numbers as consumers spend less and corporations lay off workers to offset their lower sales. Last year, unemployment was under 6%, it is currently at 6.5% and continues to rise. We expect it to top 8% before the economy turns around next year.

The massive government stimulus packages will top $1 trillion and likely take 2-3 quarters before the full impact of their economic benefit is felt. However, there are already some signs of improvement. The bond and credit markets have seen the beginning of a reduction in numerous risk spreads. This is an indication that money is beginning to circulate through the economy.

Usually during stock market declines bond prices move higher. However, from the middle of September to the middle of October this was not the case and many investment grade corporate bonds also lost 10% to 30% of their value during the panic selling. In the last several weeks as risk spreads have reduced, the normal relationship is being reestablished and bond prices are holding steady or moving higher even while the stock market declines.

As the overall political, economic and market conditions remain unclear and unstable, we understand that stability is at a premium. Thus, we continue to review the vast securities world for positions that will benefit your portfolio. Our approach is three fold:
1. Hold a majority of the portfolio in very safe securities where the yield is moderate (4% to 6%) and the risk to principal and volatility are very low.
2. Continue to hold only a small portion of the portfolio in the stock market.
3. Staying vigilant by watching the markets and looking for opportunities. We have found many securities that will add great value to the portfolios once the markets are more stable.

Market Update

There are three problems currently facing the economy and markets. First, too much credit was created for individuals, corporations, and government and it needs to be unwound. Individuals and corporations have begun that process and it will continue for several years. Second, the U.S. economy’s recession began near the start of 2008. Even though government statistics masked its existence, it was evident through common sense observation. Recessions are a natural part of the business cycle and need not be feared. They generally last 12-16 months, causing stock markets returns to be low or slightly negative for a few months and bond prices to rise, offsetting some of the stock market’s return. However, the third factor, the recent credit freeze, has caused a powerful flight from risk pushing virtually all security prices much lower. This, in turn, makes the first two problems worse.

The credit freeze is much like a financial heart attack. It does not matter what other illnesses the patient may have, because they become irrelevant if the heart cannot be restarted. If credit does not flow through the economy’s veins, then business will come to a halt. Every week that conditions were frozen will likely add one month to the patient’s recovery. Thus, we expect that the four weeks from mid-September to mid-October will add four months to our recession, taking us out to mid-2009 before conditions begin to look better. The stock market, however, will anticipate the recovery and begin to move higher before the news media can report improving conditions.