Download Q4 2007 Market Commentary (Excerpt)

Q4 2007 Market Commentary (Excerpt)
February 25, 2008 S&P500 Index 1386
The only thing we have left out so far is the effect of leverage. The effect of leverage on
asset values is like the effect of steroid use on personality. Behavior becomes more
erratic, unpredictable and violent, and, at extremes, can unbalance a market as a result,
with the extreme selling or buying having no correlation to the "real-value" of
businesses, stocks, bonds, commodities, or anything else.
As the challenges of rapid and pervasive inflation, asset liquidation, business
contraction, housing market collapse and reduced corporate earnings combined with
large balance sheet losses, affect the economy and financial markets, they are to some
degree offset by very rapid and large federal reserve short-term interest rate decreases,
recycling of petro-dollars back into the US to buy stakes in US companies, and "bailouts" of large companies by depositing capital back into them to bolster their balance
sheets. Also, the federal government is about to attempt to stimulate the economy by
passing out almost $150 BILLION in checks to consumers with the hope that they will
spend the money and boost the economy. The problem is that this will increase our
deficit much more in the long run, and add to the inflationary pressures. The Federal
Reserve, by reducing the cost of borrowing money, also adds to inflationary pressures
as the dollar falls and commodity prices are bid relentlessly higher.
With all these competing issues helping to create great economic and financial market
uncertainty, the daily "news flow" has an outsize impact of market psychology, and the
spikes up and down in all markets are incredibly fast and increasingly unpredictable.
These moves are "ramped-up" even more by the "steroid use" of computer technology
that can now simultaneously move BILLIONS OF DOLLARS into and out of stock, bond
and commodities markets all over the globe in LESS THAN ONE MINUTE! The
combined effects of technology + leverage + uncertainly have resulted in daily market
choppiness and reversals punctuated by extreme moves of 15-20% in the major market
indices in just a few weeks, and 30% or more moves in industries and countries in the
same time period. The first three weeks of January 2008, annihilated the returns in
several US market indexes going back as far as 2004!, and, with the S & P 500 now at
1353, we are back to where we were in May 1999!, almost NINE years ago! In fact,
after expenses, someone that has owned an S & P 500 Index Fund has most likely
LOST money over this time period, and, after taxes and nine years of inflation, in part
fueled by the crash in the US dollar, they have CERTAINLY LOST BUYING POWER!
This is a poignant example of why, in my opinion, the "buy and hold" strategy of simply
owning an Index Fund, is flawed, misguided and a potential recipe for financial disaster.
How much more does it cost to heat your home now than 1999? How much more does
it cost for a year of tuition at your favorite college? What about an overnight hospital
stay? You simply CAN NOT afford to continue owning poorly performing investments
while costs rise! Intelligent investing is about the process of continually evaluating
opportunities and then strategically deploying capital into investments that have the
potential to make money and increase net worth. Anything less is a fool’s errand and a
waste of valuable of time and money!
Diversification of investments, and CHANGING your investments as financial market
and economic opportunities dictate, has become ESSENTIAL! You, as an investor, can
NOT afford to be lazy, or uninterested, or adopt an "I'll think about it" mentality. Markets
today move in "COMPUTER TIME": Seconds, Minutes, Hours or Days. People react in
"HUMAN TIME": Days, Weeks, Months or Years. On January 23, the Philadelphia Bank
Stock Index - Symbol BKX, a weighted average of the values of many of the largest
bank stocks IN THE US like Citigroup, JP Morgan, Bank of America,, moved 15% IN
ONE DAY! Many of the individual stocks of these monster banks moved 20% - 30%
DURING A FEW HOURS OF THAT DAY! THIS is how markets move today! There is
often no time to sit back and "Think about it" or to avoid dealing with it because "I'm
swamped"; you MUST be prepared with a strategy IN ADVANCE!
Those of you who have diversified your investments and have become flexible in
changing investments when warranted, have reaped huge percentage gains over the
last nine years, while the S & P 500 has gone nowhere, but VIOLENTLY UP AND
DOWN during that time period. Perhaps even more importantly, by changing
investments when market and economic conditions have made it advisable to do so,
you have realized profits and then strategically redeployed the assets, instead of letting
the market drops take them back, and then allowing taxes, inflation and the eroding US
dollar, to devalue what you had left, even further! Just like heart disease is called the
"silent killer" as it slowly erodes and silently destroys your health and life, inflation in the
"silent killer" of your wealth as it RELENTLESSLY erodes and silently destroys the
purchasing power of your paychecks, savings, investment assets and retirement
benefits. With a real inflation rate of 5% per year, in 14 years it may cost you TWICE
AS MUCH to buy a loaf of bread as it does today, BEFORE taking into account income
taxes! If the estimated 10% annualized rate of healthcare cost increases continue, in 14
years it may cost you FOUR TIMES AS MUCH for healthcare services BEFORE income
taxes!
If you have not already done so, it is EXTREMELY IMPORTANT to call me to review
your portfolio!
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