Hand wringing and bad news make for great headlines. Meanwhile the smart money is looking for buying opportunities as evidenced by a sharp run up in the beatern down financial stocks. Financial stocks rose 7.5% on April 1st.  This was not an April Fools joke. 

With Bernanke using the “r” word now,  recession seems to be a foregone conclusion.  Many say it’s a not matter of how long but rather how severe the recession will be.

Despite all the bad news, Fed Chairman reminded us that we will work through this economic downturn. Bernanke told the Senate Banking Committee,  ”But among the strengths of our economy is its ability to adapt and to respond to diverse challenges.”   We hope he’s right. 

For a little more reading on the first quarter of 2008, click here: Market Summary

We have summarized some of the information on their positions. While this is by no means comprehensive, it is a  side by side comparison of the candidates’ basic views.   The Candidates and Taxes

Regardless of who gets elected, the inherited economy for the next President will challenge even the brightest  mortals as they use fiscal and monetary tools to unwind the consequences of the subprime mess and at the same time, prevent the economy from inflating. The looming national debt creates more issues that will not easily be corrected. 

The capital markets are reacting with a great deal of volatility to the recession that may have arrived today or will wake us up tomorrow. According to Bill Gross, manager of the largest fixed income mutual fund in the world, the policies that are being put into place to prevent a recession will  be of little consequence. In his latest written commentary for February, he writes, “To provide a stable recovery path, government spending needs to fill the gap – not consumption. Public works programs, badly needed infrastructure repairs, as well as spending on research and development projects should form the heart of our path to recovery.”  For more reading from the guru of interest rates and economic outlook, go to Read the full article here.

With recession looking more and more likely, the Fed took an aggressive posture with a 75 basis point rate cut on January 22nd and again another 50 basis points on January 30th. 

The Fed’s action sparked a rebound from those mid-month lows, but the S&P 500 still ended January with losses across the board.  Financial stocks posted gains as these were immediately boosted by the Fed’s actions.  In particular, banks and REITs gained for the month. 

Technology stocks were hurt and one of the main drivers was Apple which fell over 31%. But Apple’s decline is a mere fraction of this past year’s increase, which resulted in its market cap exceeding that of both Citigroup and IBM.  

The other news is that Congress put party lines aside to approve the President’s $150 billion fiscal stimulus package aimed at putting money back in the hands of the consumer.  The Senate now needs to approve the package. This also helped boost the markets higher at month end.

So far, 2008 has been bumpy ride for investors. Fasten your belts. 

What the Experts are Saying

Does it feel like the ’hair of the dog that bit you’?  We got into this mess with easy credit and low rates with the home and credit card as the cash machines to support the consumption.  There is a notion that more and more spending will avoid a recession.  That is probably true, however, sustainable growth needs more than just a shot in the arm to the consumer.  The U.S. cannot have a growing economy with a large debt hangover in our homes and in our government. There is the short term and there is the long term. Unfortunately, we seem to manage only to the short term.

Let’s hope this juggling act of boosting the economy while keeping inflation under control does not produce longer term undesirable consequences.

Flashback to WIN 

The 1970’s was a period when higher energy prices led to inflation but also recession was in the waters too.  At that time, the Fed’s focus was to prevent a recession and meanwhile, inflationary pressures continued.  While inflation continued to be a problem, unemployment was rising to levels above 10%. Inflation was so bad, President Ford crafted a whole grassroots campaign with WIN buttons: ”Whip Inflation Now”.    There is a button for sale on eBay for $3.99 (not including shipping costs).  Assuming the lucky seller bought it in 1974 for a dime and he sells it today, he will have really whipped inflation with an estimated 11.5% annualized rate of return over the past 34 years!

2007 Market Review and Outlook

While the year to date results should provide comfort with respect to November’s losses, we can offer no short term prediction of what remainder of December will bring. We focus on the long term and do not attempt to time the markets. Long term investing requires patience and often a healthy dose of skepticism to avoid following the crowd in either direction.

¹The Russell 2000 is comprised of the 2000 smallest US companies.

China – US, not a simple one-way street

It is very easy to become frightened about the US dollar and China’s massive stake in our currency. But even if they wanted to dump our currency, it would not be a plus for them, either. China relies on the US as an enormous outlet for manufactured goods. We need them to make it, and then we consume it. Until the Chinese populace accumulates enough broad-based wealth and habitually consumes more, they will need us to have a healthy economy. Dumping the dollar will not be a good thing for either country. Diversification of your investments to include non-US equities as well as US equities will help to maintain a balance while tension continues.

The consumption problem

The US consumer accounts for much of our GDP. We have been terrific consumers, but we have been doing it by trading future economic security for consumption today through credit cards and home equity lines. We spend more than we make. The US consumer needs a financial makeover. And if we spend less (and save more), this will translate into lower demand for goods imported from China and elsewhere. As this change works its way through the system, the pricing mechanisms will adjust and inflation may continue to be low. S&P 500 consumer discretionary stocks are down over 9% year to date as the markets anticipate weakness from the consumer. As consumers start to rein in their spending, discretionary stocks may continue to be weak and the consumer staples, food and beverage companies, should benefit.

Inflation and energy

Speaking of inflation: Just when oil is hitting $100 per barrel, and just when you think there is no stopping its rise, all of sudden we hear that demand is declining and prices are falling. Is it possible that the exorbitant prices have produced a supply glut? Too much oil at too high a price? Are these economic mechanisms working, after all? While higher energy prices tend to translate into higher prices for goods and services, other factors are keeping prices down: competition from developing countries and cheaper labor costs. Inflation has been contained for some time not only in the US but globally as well. If your portfolio has significant overweight in energy, perhaps it has done quite well. However, bubbles do burst, and a broad exposure to industry sectors is also an important component of your investment program.

Blind competitiveness and lessons learned from the sub prime crisis

Making loans to people who can’t afford them is an ugly business. Wall Street packaged these questionable loans into “low-risk” investments with attractive yields. Hedge funds and other investment managers jumped at the chance to buy them because these yields were especially attractive in a low interest rate environment. Simply looking at the credit rating of the entire bundle appeared to have been considered sufficient. It was a case of so many loans in the packages and so little time to figure out if these were creditworthy investments . Looking back, it seems a bit superficial to have simply relied on the credit rating agencies.

Then there was the consumer who should have known that there is no free lunch. Rates go up and rates go down. They weren’t worried if the value of their homes kept rising; on the contrary, they were betting on the future.

Lastly, the mortgage brokers had the green light to make loans without documentation of income and supporting documents; the borrower just would have to pay a bit more in interest. If the mortgage broker at Countrywide didn’t make that loan, the competitor next door or on the internet would. So now, what? Extra scrutiny and a pendulum swing back towards caution. Lessons are learned over and over again. It won’t be the last time either. US Treasury bonds and equity investments in companies with high-quality balance sheets and excellent cash flow should benefit from a more cautious investment environment. Investors are punishing the major investment banks and consumer finance companies for their inability to manage and measure risk.

An unexciting but optimistic conclusion

Bad economic news and pessimistic predictions sell papers, sell ad space, and draw us to the internet press. Regardless of the current market volatility and tone of the economic news, good minds are finding solutions to improve health and productivity. These ideas will generate capital, which flows back into the economic system. Great products and ideas grow out of difficult times. US innovation, productivity, and access to capital will continue to be hallmarks of our economic system.

In the race for investing towards a financially secure retirement, it’s not how fast you come off the starting block; rather it’s how well you stay on the track. At LTSave, our goals for you are straightforward and simple:

1. Stay on the course towards your retirement goal

2. Don’t sell into weakness or panic when the world or the markets seem uncertain

3. Know where you are and check in with your financial advisor as you would with your doctor for an annual physical

4. Be responsible with your money and save