Thursday, July 3, 2008

Where Do We Go From Here - 2nd Half 2008

In the office, we have been talking at length about the direction of the market for the 2nd half of 2008 and into 2009 for the past few days. The Dow and S&P 500 are loaded with financials. As the year continues to progress and earnings and any other issues are finally put to bed, the financials should start to recover.

There are definitely some rallies out there to build on, and we believe the financials are going to be a big part of them. Deutsche Bank (DB) has already said it will be profitable in the 2nd quarter and it will have no more write downs. This goes in the face of what the market had believed would happen as it was forecast to lose and add additional write downs. Most of the banks should start to do the same. Bank of America has completed the deal for Countrywide because they want to service the loans. The interesting issue here will be that this will probably help if only to get beyond the doubt of the completion of the deal.

Also, there have been several news articles lately that have said the write downs have been exaggerated due to the "rules of accounting". Essentially, the rules state that the banks evaluate the investment at the "market rate" (mark to market), but when the investment has no current market value, the investment is marked to zero. This does not mean the investment has no value, but its value is masked in the vacuum of no market. There is a very good article from the NY Times - click here to read it. It should definitely shed some light on markdowns and what they actually mean in both accounting and realistic terms.

We do know that we continually analyze the market, and we definitely make adjustments to our clients' investment portfolios on an as needed basis. For the 2nd quarter, we outperformed all three of the major indices with our results being +0.99%. The Dow (-6.9%), the S&P 500 (-2.7%), and the NASDAQ (+0.8%) were clobbered with a horrible June.

The market ahead will be bumpy for the short term, but the long term outlook is positive as financials (a conservative bellwether) gets its feet back under it. The Dow and S&P are financially heavy that as this sector starts to improve the indexes will jump.

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