RE: Third Quarter 2008 Investment Management Review
We are summarizing investment performance for the third quarter of 2008 and outlining our view of financial markets going forward.
Overview
The numbers for the third quarter of 2008 were as follows: The overall market, as measured by the S&P 500 was down 8.88%, the bond market, as measured by the Lehman Aggregate Bond Index was down .53%, and a balanced portfolio, based on an equal weighting of these indexes, was down 2.65%. For the year, the S&P is down 20.57%, the Lehman Aggregate Bond Index is up .68% and a balanced portfolio, based on equal weighting of these indexes is down 7.11%.
Typically our newsletter is written shortly after the close of the quarter and the reports are circulated in the first few weeks of the following period. These reports have been generated to reflect quarter-end numbers but we have also been updating our newsletter almost daily so this overview reflects the current environment. An environment which changes daily and has more volatility than Britney Spears and Brett Favre!
To begin let’s take a look at some of the events that have occurred since our last newsletter: Fannie and Freddie Mac were taken into conservatorship by the Federal Housing Finance Agency and shares plummeted to penny stock levels. Lehman Brothers filed for Ch.11 Bankruptcy protection and was later acquired by Barclays. AIG was bailed out by the Federal Reserve Bank of New York to the tune of $85 billion in an exchange for a 79.9% equity percentage in the company. Washington Mutual Savings Bank was seized by the United States Office of Thrift Supervision and placed into receivership of the FDIC. The FDIC almost immediately sold all loans and deposits of Washington Mutual Savings Bank to JP Morgan Chase. The government hastily revealed the Troubled Asset Relief Program (TARP), aka “The Bailout”, in an effort to get bad loans off the books of troubled finance companies to help revamp the credit freeze. Politicians from both parties used this proposal as a pulpit to express their own agendas ultimately causing the Bill to fail at the Congressional level. Our leaders looked lost, tired and incapable of solving this crisis. The markets reacted with a historic selloff so our politicians changed their votes after shoving a bunch of pork into the final bill. The delay in passing this bill and the incompetence of our leaders threw the markets into a historic tailspin and headlines began to reference the Great Depression, bread lines, gold bars and money under your mattress.
Many pundits have argued that the government intervention thus far is a threat to the free capital markets as we know them and that this will set a very poor precedent going forward. Others have argued that without this government interference, the credit markets and banking industry would be insolvent and that the United States would be in jeopardy of a colossal collapse that would jeopardize its global prowess. Either way, like it or don’t like it, something had to be done and we were relieved when the bailout package was finally passed.
The cause of all this financial meltdown centers around people, corporations, and government taking on too much debt. From the top down, government loosened the reins on Fannie Mae and Freddie Mac (Government Sponsored Entities, GSE’s) to make easy money available for homeowners. Banks were forced to complete with this easy money and started to lower their lending standards. Individuals were happy to sign up for loans that they couldn’t afford. As housing prices starting to come down and homeowners started to default on their mortgages, banks started to lose massive amounts of money. This created a circular meltdown where banks would sell houses at foreclosure which brought the real estate market down even further. There is plenty of blame to go around this time but the lawmakers will undoubtedly have hearings on this mess to determine the required scapegoats.
Clearly, the financial markets are in total disarray. From here, we continue to see massive government intervention in the free markets. This week the government said they were going to use part of the 700 Billion dollar bailout package to directly invest into US banks. The implementation of the plan will take months to have an affect on the economy. Pumping these kinds of dollars into the economy sounds like the recipe for inflation. The two offsets to potential inflation are the massive amount of asset deflation (house prices, stock prices, etc) we have had and the ailing economy. It is very difficult to see where we are heading but playing it conservative is clearly the path we have been on and continue to be on as evidenced by your superior performance figures relative to the markets.
As money managers, our job is to preserve capital and conservatively grow your investments. In these times, we will continue to hold large amounts of cash in your portfolio and just as importantly, we will continue to diversify your investments into areas such as the GAP Fund and other available alternative investment vehicles. As you know, the GAP Fund was built to withstand turbulent markets and continues to be a consistent performer in your portfolio. Over the next few months you will most likely see some stock additions to your portfolio in the healthcare and energy sector. These two sectors represent incredible values given the pullback in the market. They are also two areas that are critical to individuals regardless of what the economic future looks like.
As always, we appreciate your continued confidence and look forward to another prosperous year!
Chris Reedy, CFP®		Jim Macy, CFP®