Monday, October 6, 2008

Chapter 2

“No man’s life, liberty, or property are safe
while the Legislature is in session”
Daniel Webster

Well, the ‘rescue’ package passed (we’re glad). Following the notion of not wanting to see politics or sausage being made, the bill not only raised the FDIC insurance level (good), and kept the reverse auction of mortgage securities (good), but also gave a tax break to children’s wooden arrow manufacturers, fishermen in Alaska affected by the Exxon Valdez, NASCAR, and Hollywood. When the dust cleared, some of the mess is fixed, and some still needs to be fixed. The market lost more during the week than the bill cost. While everyone seems to be running for the exits, I can’t help but feel like a kid in a candy store (or maybe a kid on Christmas morning???). The fear and panic is causing opportunities that don’t make sense to a rational person, but then again this market is completely irrational. We’re seeing large multi-national manufacturing companies with extremely strong credit ratings paying exorbitant rates to borrow money, and their stocks are trading at levels that imply they are on the verge of closing their doors. Municipal bonds are trading at levels never seen before and likely never to be seen again. It is time to start exploiting the panic.

Warren Buffet, who has a reputation for making some reasonably good investments (Berkshire Hathaway is the best-performing stock in history), jumped in with big investments in the preferred stocks of Goldman Sachs and General Electric. Wachovia Bank, one of the apparent victims of the crisis, was scheduled by the FDIC to be sold to Citigroup; then Wells Fargo (established in 1852) rode in on the stage coach with a chest full of stock, and trumped Citi and the FDIC. The smart money is starting to move.

You obviously know we have watched with dismay the ugly spiral of greed and fear that this crisis has caused; but through all of this, we know the turbulence ends and business continues. We also know historically that every major change in the financial markets/system has caused turmoil and created opportunity, and this time is no different. It appears likely that the Central banks will cut interest rates in an effort to further restore the troubled financial sector, which should eventually lead to loosening of the credit markets. However, rest assured more chaos will ensue. Yet, “In chaos lies opportunity.”

We all feel the affects of a recession (haven’t we been saying there was recession for over a year now?), and very few of us remain untouched by the lack of lending in the credit market, but the notion that the sky is falling is misguided. First of all, if the sky is actually falling, there is no where to hide (e.g. your bank is no safer than a stock). Second, a vast majority of companies, particularly U.S. companies, although they need credit and banking, make something or sell something. And they’re on sale.

We will be carefully analyzing the markets and finding the best opportunities and allocations for your portfolios. We will be evaluating the world markets, looking at how they have been acting and reacting to each other, as well as seeing how future expectations have changed. You may see some over weighting of certain areas and underweighting of others. It is situations like these that give proof positive to the Asset Allocation philosophy that we annoyingly preach. A good portfolio is a recipe: some ingredients are on sale and we’re going bargain hunting. Chapter 2 has started.

Leon LaBrecque