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Monthly Archives: October 2008

A Bull Market for Volatility

Last week’s stunning stock market plunge of 14% may not have been the stock market’s worst week ever, but it sure felt that way. Last week’s returns contributed to a peak-to-trough decline over the past year of 42%, roughly in line with the worst bear markets since the Great Depression. This dramatic move merits examining how we got here, how we will get it out, what the consequences will be, and what investors should do.

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Financial Crisis Continues to Hammer the Real Economy

The panic selling in the world financial markets over the past week was unprecedented, and while equity values don’t directly impact economic activity, the indirect effect of falling equity prices, the acute credit crunch, along with the steady erosion of confidence in the U.S. and global financial systems, will certainly adversely impact U.S. economic growth in the current quarter and for many quarters to come.

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To Invest or not to Invest?

Varying investments rspond differently to market upheavals. Illustrated here, the Dow Jones Industrial Average and NASDAQ demonstrate how stocks have often closed down following significant historical events. Note, however, that over time the upward trend is significant.



The Depression of 2008? Don’t Count on It!

Wall Street is Dead!

Whether it was murder or suicide is beside the point: Wall Street as it has operated for the past 75 years has been obliterated in a matter of weeks. And witnessing this violent death in broad daylight has traumatized investors everywhere.

The Wall Street domino has toppled just about everything in sight: U.S. stocks large and small, within the financial industry and outside of it; foreign stocks; oil and other commodities; real estate investment trusts; formerly booming emerging markets like India and China. Even gold, although it has inched up lately, has lost 10% from its highs earlier this year. Not even cash seems entirely safe, as money-market funds barely averted a "run on the bank".

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Some Perspective on the Stock Market and Volatility

Michael BooneIn our experience, people tend to look at the stock market in one of two ways.  Most people see the market like this, and they are absolutely correct ………….

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Are Municipal Bonds Attractive?

Municipal bonds have dramatically underperformed high quality taxable bonds with price weakness reminiscent of the late February sell off. Forced liquidiations resulting from the latest round of financial markets turmoil was the primary driver, but money market mutual fund fears and poor liquidity also played a role.

Money fund liquidations, including an 8% contraction in tax-exempt funds, overwhelmed bond dealers who were unable to absorb the supply. The result was a sharp spike in yields for Variable Rate Demand Notes (VRDNs), a security that makes up the bulk of municipal money market fund holdings.

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Market Letter

Today, we endured a full scale global financial panic.  The main stock market indices, the Dow, the S&P 500, and the NASDAQ finished down about 4 percent each.  It was much worse earlier in the day.  Last night and this morning we saw similar drops in Asia and Europe.  This selling was indiscriminate; all of the major S&P sectors were down by like amounts.  Oil and other commodity prices were also down sharply.  While declines in oil prices provided a rare piece of good news for U.S. consumers, emerging nation stock markets were down sharply, especially for commodity producing nations like Russia and Brazil.


Unhappy Anniversary

A month ago we wrote that September is a tough month for investors. Historically, the S&P 500 has posted a decline in September, on average. We also noted the tendency for the stock market to go from a Labor Day Slump to Election Day Jump. With September’s performance far worse than just a slump with a loss of 9% for the S&P 500, what does October hold as we head into the week that marks the bear market’s one year anniversary? The S&P 500 made its all time high last year on October 9, 2007.

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Plan B: If Policy Does Not Heal Credit Markets, the Fed with Reflate

With little fan fare, Federal Reserve Chairman Bernake has dropped out of sight on the struggle to get legislation passed to deal with the financial crisis, which does not mean he has returned to business as usual. Instead, I believe the Federal Reserve (Fed) is moving ahead with Plan B. Plan A is to pass the Emergency Economic Stablilization Act (EESA), a fiscal policy action. And the EESA has now passed both the Senate and the House and will shortly be signed into law by the President. While I believe that the EESA will work to reduce the stress in credit markets, that is, by no means a surety. I believe that Plan B, ready in case Plan A fails, is to deal with the crisis using monetary policy.

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Investing Insights: Good News about Bear Markets

Many, although not all, of the market declines listed below occured during recessions in the United States. Per the U.S. Department of Commerce, over the past 50 years after stocks have made their lows during recessions, the economy continued to slow for 4-6 months while stocks rose on average 25% (as measured by the S&P 500). New home prices slid for 2 or more months according to the U.S. Department of Census as stocks climbed 24% (no data prior to 1970), and the U.S. Department of Labor reports that unemployment continued to rise for at least four months as stocks gained close to 30% on average. Thus, using history as a guide, those investors that await an improvement in economic output, home prices, or employment are likely to miss out on powerful gains in stocks.

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