Investment Recap Third Quarter 2008

Markets have gone from fear, to greater fear, to panic. The month of September was difficult, but October has become worse due to what has been described as a “credit market freeze.” As we all know by now, commercial paper issued by corporations was unable to be rolled over. Small businesses had trouble borrowing from the banks, and individuals were denied credit to buy cars, etc.
The government “TARP” program is designed to provide liquidity to the banking, credit and financial systems to the tune of $700 billion. As recently as this past week, eight or nine major banking institutions received capital from this program to shore up their balance sheets and have been encouraged to lend.
The “brilliant creators” of CMOs, SIVs, and Credit Default Swaps leveraged the bank and brokerage capital to as high as 30:1 and precipitated the excesses leading to our financial crisis. We believe in the creativity of those “fixing” the system and attacking the now-glaring problems. Never has so much monetary and fiscal policy stimulus (with more to come) been used to ensure against a “depression” type of outcome.
Understanding the complexities of all these moving parts and making economic and market forecasts is truly a difficult task. We have maintained or added to reserves in our client accounts, and we are making changes in the equity portfolios to reflect our current outlook. Even the bond market has not been immune. Tax free bond prices have gone down about 8%, offering astonishing opportunities. Corporate bonds as well are presenting compelling opportunities with yields of 6-7% on 5-year high quality paper. As for stocks, if we had just returned back to Earth from a ten year journey to outer space, we would be salivating at the bargains available to be purchased. As it is, the large mutual fund redemptions and “blow up” of many hedge funds has caused a “dumping” of stocks without regard to their long term fundamentals.
Forgive us for viewing the glass as half full, but only a few months ago consumers and forecasters were obsessively depressed at the price of $140 barrel of oil (it is today at $70 barrel). We firmly believe in the theory of “time compression of events.” (Some of our clients have heard this from us on occasion.) Cycles which took months and years when I first got into the business now take only weeks or months. We believe that given all the attention, stimulus and resources attacking the problem, that markets will be pleasingly higher within the next few months.