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STOCK MARKET COMMENTARY
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Stock Market Update
Up through the end of April, Optivest clients had been under invested in stocks and lagging the S&P 500. In our recent Second Quarter Newsletter, we wrote that we “expect a near-term consolidation/correction from May through September.” Further, we forecasted that we would have a 10-15% drop and that the 1000 level on the S&P 500 would hold.
Optivest's 2010 Outlook
As we wind down 2009, we have made some strategic shifts in our discretionary accounts. Specifically, we believe the 10 month “long the market, short the dollar” strategy has run its course and we have profitably lightened our stock exposure and have sold our anti-dollar investments (commodity fund, Swiss Francs, gold, oil, foreign TIPs). Inflation will undoubtedly pick up next year at some point, but we feel it will be CPI based, not just the weak dollar.
Transition in the Air
Since our emails to you on March 10th and 23rd about the market's bottom, the stock market advanced quickly in March, April and May, stalled in June, did a short dip in early July, and then rallied sharply through last week. We suggested in our first Quarter Newsletter, and acted upon for our accounts: transitions into small and medium cap stocks, switched from growth to value stocks, and moved into developing international markets. We also took early positions in commodity pools and more recently, in anti-US dollar bets. These have worked nicely so far, but we feel a transition in the air.
The New Normal
Like the aftermath of 9/11, I believe that the United States will have some lasting implications from the near collapse of our financial systems and our current worldwide asset devaluation. I have been an interested observer, as you may have, in the rapid unwinding of asset-backed leverage and the subsequent damage it has caused across all investments and previous assumptions of what is safe and truly secure. In addition, our political climate is similarly changing faster than anticipated, with new programs being announced almost daily. All this has understandably caused a high level of anxiety and fear. Most of us long for a return to the "normal" that we thought we understood and knew how the rules worked. While I am not a doomsayer, or believe that we are entering a decade of economic depression, I nevertheless do not believe that we will be returning to the "old normal" either. There are simply too many shattered dreams of homeownership, retirement plans, careers and investment norms to handle debt, spending and savings in the ways that got us, as a nation, in trouble.
Stock Market Bottom?
I am very encouraged by today's market action and the 9:1 up volume on the NYSE. In addition, today’s P/E ratios, book/market, and other valuation measures are equal or lower than past bear market lows. Assuming some strong follow through in the next week, I believe that we hit a multi-month low yesterday, and will start a choppy advance over the next few months.
Lessons From An Old Mountain Guide
While I have been in the wealth management business for 30 years, I have been climbing mountains even longer. Madison Avenue has long used mountaineering pictures for investment advertisements, but has failed to make the best analogies. A year like 2008, one that humbled professionals and amateurs alike, is the perfect setting to learn from the wisdom of old mountain guides and their credo.
Don't Waste a Good Recession
I have just returned from James Doti Chapman University's 31st Annual Economic and Business Forecast Conference. They have a good, long term track record and were one of the first groups to forecast a recession for 2008 and Obama's victory. Here are some of his predictions:
Recessions Create Lucrative Investment Opportunities
On Monday December 1, 2008, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) determined that a recession began December 2007. This committee, made up of renowned economists, is the official source for dating United States recessions. Historically, some of the best investment opportunities occur at or near the time of recessionary announcements.
Best Investment Opportunity in Over 25 Years
Stock valuations are currently very attractive. On Monday November 17, 2008, Value Line estimated the median stock price appreciation potential is 160% for the next three to five years. Since January 1968, Value Line has published their estimated median price appreciation potential for the 1700 stocks they analyze. Value Line is one of the most trusted and prestigious names in the investment field. The last time Value Line estimated a median price appreciation potential of 160% or more was August 1982. Three years later the S&P 500 had returned over 150% and five years later the S&P 500 had generated returns over 250%.
The World Stock and Bond Markets are oversold and a Rally is Imminent
Just like the rise of oil this year went up one side of the Eiffel Tower and down the other, the recent drops in the world stock and bond markets are also unsustainable. As you will see in some examples below, today's values are so low that value investors are soon to rush in.
Financial Crisis Update, Part II
The current financial crisis reminds me of a movie from the 50's, "The Day the Earth Stood Still". With a frozen and fearful credit market, lending for virtually everything has stopped. A true panic has caused runs on money market funds and banks (WAMU saw $16.5 billion withdrawn from its bank in the week before it was seized by the FDIC). These are supposed to be the "safe" places to put your money. Goldman Sachs, the most revered of all investment banks, recently had to borrow money from Warren Buffet at 10% interest. If Goldman Sachs has to pay 10%, everyone else down the food chain has to pay more. This also means that the yield on corporate and muni bonds have sky rocketed, driving their prices down.
Wall Street's Losses
Today's stock market decline, caused by the near failure and subsequent takeover of Merrill Lynch (the largest brokerage firm in the world) and AIG (the largest insurance company in the world), along with the filing for bankruptcy by Lehman (4th largest brokerage firm) was nothing short of all out panic selling which will probably spill over to tomorrow. Washington Mutual and Wachovia also badly need infusions of capital to survive. It is amazing how much damage has been caused by the national decline in housing and the subsequent drop in value of the corresponding mortgages. Nevertheless, the problems that have been plaguing these huge firms are finally being addressed and by the end of the month, if not this week, the worst could be over. Fortunately, this is having little effect on the value of your Optivest account, as your investments are broadly diversified and well balanced , and continue to hold up well.