From the Desk of Joe Rollins
Coming out of the third quarter, I feel sort of like Rip Van Winkle waking from his 20-year sleep and discovering that his life and the world as he knows it have completely changed. The only difference is that it only took 90 days for such confusing, profound changes to happen in our financial system. When we reflect on the third quarter of 2008 in future years, I am sure we will all realize that it was one for the ages. So much happened during this quarter that I am certain entire textbooks will be dedicated to the subject.
If I had been told on Friday, September 26th that Wachovia Bank – with a market capitalization close to $30 billion and its book value at $29 per share as of that date – would essentially be worthless on Monday, September 29th, I would never have believed it. Today – only four days later – it was sold to another bank. Geez! Likewise, if I had been told that the infamous 150-year old Wall Street brokerage house, Lehman Brothers – which made $7 billion in the previous fiscal year – would file for bankruptcy only 60 days later, I would have scoffed in disbelief. Similarly, if I had been told that AIG – one of the most legendary and financially strong insurance companies – would be brought to its knees by stock speculators, I would have found that be equally inconceivable. I would have found it even more outrageous that the U.S. government would make an $85 billion loan to a private enterprise in order to keep them from bankruptcy. The fact that these events (and many more) actually occurred during the third quarter is stranger than fiction!
It seems that fundamental investment analysis meant nothing during the third quarter. By all measurable standards, stock market investing is cheaper today than it has ever been during my investing life. It was also a quarter where asset class made no difference. Other than U.S. government bond funds, every asset class lost money during the quarter. Bond funds protected investments only marginally better than stock funds. As we discovered, even cash wasn’t safe during the quarter. There was such a rush by the investing public to invest in Treasury bonds that at one point during the quarter, Treasury bonds had a negative rate of return. This means that some investors were willing to incur a loss only for the certainty that their money would eventually be returned. It was, by all standards, an extraordinarily difficult quarter – and it was certainly one for the ages.
There’s no way to sugarcoat the performance for the third quarter and for the year-to-date; it was terrible. Even a broadly-diversified portfolio would have returned significantly negative results. However, performance has not been based on fundamentals or profitability lately; rather, the losses were caused by fear, misinformation and governmental intervention. It is impossible to evaluate the losses based upon the fundamentals, as earnings continue to be good and interest rates are low. These factors mean that the stock market should be bursting higher, not lower! Did I mention that fundamental analysis meant nothing during this eventful quarter?!?!
For the nine-month period ended September 30, 2008, the Dow Jones Industrial Average was down 16.5%, and for the one-year period, it is at negative 19.8%. The Standard & Poor’s Index of 500 Stocks is down 19.3% in 2008 and down 22% for the one-year period. The NASDAQ Composite was down 21% for the first nine months of 2008 and down 22.3% for the one-year period. I understand that these are awful percentages and that they are very disappointing to investors.
During the quarter, we worked diligently to stave off the losses. Since the U.S. dollar was appreciating (making foreign investments less secure), we rotated out of nearly our entire international portfolio. We sold all of our emerging market funds and moved the money back to the United States. Even though the companies that base their profits on oil are by all standards the cheapest of any securities, the international emerging market funds got crushed during the quarter since many of these countries are oil rich.
Finally, during the quarter – once the SEC intervened to reduce short-selling in financials – we liquidated all of our convertible securities. In only a short, one-week period, these securities lost 15% in value. This was a quarter where typical investing took a back seat to fear, speculative buying and sector rotation on almost a weekly basis.
After reading the above, you might think that I’m discouraged, but that is not the case. In fact, I cannot remember a better opportunity for positive investing that is as pronounced as it is today. I am amazed that such overwhelmingly good opportunities continue to be sold off on a daily basis. It is very common today to invest in Blue Chip stocks earning dividend yields in excess of 4% and, in many cases, greater than 5%. However, many investors seem to prefer to be in cash earning less than 2%. Stocks of almost all of the big industrial companies are excellent investment opportunities, but the public fears investing right now. Therefore, these buying opportunities are not being seized.
There’s no question that the economy has slowed. It is likely that we will now have two back-to-back negative quarters – the third and fourth quarters of 2008. In spite of that possibility, I believe they will only be moderately negative and that we are not facing a serious recession.
I’ve often said that, “You can’t fight the Fed.” Our Federal Reserve and the Bush Administration have pumped literally trillions of dollars into the U.S. economy to free-up credit. There are not less dollars today than there were one year ago; in fact, I rather suspect that there are billions more. This is a unique time where no one seems to trust anyone. Banks are hoarding money as they fear customers will withdraw their cash and hide it under their mattresses. Banks will not even lend to other banks, much less to customers. However, the Federal Reserve is changing all of that.
As I have said before, the “cavalry” is on its way. The banks are being injected with billions and billions of new cash. The money they are going to receive from the government cannot be invested and must be loaned soon. As the banks start to put their cash to work and lend to each other, the economy will improve. I believe that we are within a short six months of the economy getting better. To give up the investment opportunity of a lifetime for only six more difficult months seems ill advised.
The stock market’s performance is a future indicator, as it typically experiences a turnaround and gets better before the wider economy. I am not certain when that day will come, but I believe it is very close. I recognize that this has been a difficult quarter, but I assure you that we are working hard to protect your investments. During this quarter, survival mode far exceeded investing fundamentals.
As the markets stabilize, we have the opportunity to move forward; I sincerely hope that investors will remain patient and wait for the good days to return. Best regards.
Coming out of the third quarter, I feel sort of like Rip Van Winkle waking from his 20-year sleep and discovering that his life and the world as he knows it have completely changed. The only difference is that it only took 90 days for such confusing, profound changes to happen in our financial system. When we reflect on the third quarter of 2008 in future years, I am sure we will all realize that it was one for the ages. So much happened during this quarter that I am certain entire textbooks will be dedicated to the subject.
If I had been told on Friday, September 26th that Wachovia Bank – with a market capitalization close to $30 billion and its book value at $29 per share as of that date – would essentially be worthless on Monday, September 29th, I would never have believed it. Today – only four days later – it was sold to another bank. Geez! Likewise, if I had been told that the infamous 150-year old Wall Street brokerage house, Lehman Brothers – which made $7 billion in the previous fiscal year – would file for bankruptcy only 60 days later, I would have scoffed in disbelief. Similarly, if I had been told that AIG – one of the most legendary and financially strong insurance companies – would be brought to its knees by stock speculators, I would have found that be equally inconceivable. I would have found it even more outrageous that the U.S. government would make an $85 billion loan to a private enterprise in order to keep them from bankruptcy. The fact that these events (and many more) actually occurred during the third quarter is stranger than fiction!
It seems that fundamental investment analysis meant nothing during the third quarter. By all measurable standards, stock market investing is cheaper today than it has ever been during my investing life. It was also a quarter where asset class made no difference. Other than U.S. government bond funds, every asset class lost money during the quarter. Bond funds protected investments only marginally better than stock funds. As we discovered, even cash wasn’t safe during the quarter. There was such a rush by the investing public to invest in Treasury bonds that at one point during the quarter, Treasury bonds had a negative rate of return. This means that some investors were willing to incur a loss only for the certainty that their money would eventually be returned. It was, by all standards, an extraordinarily difficult quarter – and it was certainly one for the ages.
There’s no way to sugarcoat the performance for the third quarter and for the year-to-date; it was terrible. Even a broadly-diversified portfolio would have returned significantly negative results. However, performance has not been based on fundamentals or profitability lately; rather, the losses were caused by fear, misinformation and governmental intervention. It is impossible to evaluate the losses based upon the fundamentals, as earnings continue to be good and interest rates are low. These factors mean that the stock market should be bursting higher, not lower! Did I mention that fundamental analysis meant nothing during this eventful quarter?!?!
For the nine-month period ended September 30, 2008, the Dow Jones Industrial Average was down 16.5%, and for the one-year period, it is at negative 19.8%. The Standard & Poor’s Index of 500 Stocks is down 19.3% in 2008 and down 22% for the one-year period. The NASDAQ Composite was down 21% for the first nine months of 2008 and down 22.3% for the one-year period. I understand that these are awful percentages and that they are very disappointing to investors.
During the quarter, we worked diligently to stave off the losses. Since the U.S. dollar was appreciating (making foreign investments less secure), we rotated out of nearly our entire international portfolio. We sold all of our emerging market funds and moved the money back to the United States. Even though the companies that base their profits on oil are by all standards the cheapest of any securities, the international emerging market funds got crushed during the quarter since many of these countries are oil rich.
Finally, during the quarter – once the SEC intervened to reduce short-selling in financials – we liquidated all of our convertible securities. In only a short, one-week period, these securities lost 15% in value. This was a quarter where typical investing took a back seat to fear, speculative buying and sector rotation on almost a weekly basis.
After reading the above, you might think that I’m discouraged, but that is not the case. In fact, I cannot remember a better opportunity for positive investing that is as pronounced as it is today. I am amazed that such overwhelmingly good opportunities continue to be sold off on a daily basis. It is very common today to invest in Blue Chip stocks earning dividend yields in excess of 4% and, in many cases, greater than 5%. However, many investors seem to prefer to be in cash earning less than 2%. Stocks of almost all of the big industrial companies are excellent investment opportunities, but the public fears investing right now. Therefore, these buying opportunities are not being seized.
There’s no question that the economy has slowed. It is likely that we will now have two back-to-back negative quarters – the third and fourth quarters of 2008. In spite of that possibility, I believe they will only be moderately negative and that we are not facing a serious recession.
I’ve often said that, “You can’t fight the Fed.” Our Federal Reserve and the Bush Administration have pumped literally trillions of dollars into the U.S. economy to free-up credit. There are not less dollars today than there were one year ago; in fact, I rather suspect that there are billions more. This is a unique time where no one seems to trust anyone. Banks are hoarding money as they fear customers will withdraw their cash and hide it under their mattresses. Banks will not even lend to other banks, much less to customers. However, the Federal Reserve is changing all of that.
As I have said before, the “cavalry” is on its way. The banks are being injected with billions and billions of new cash. The money they are going to receive from the government cannot be invested and must be loaned soon. As the banks start to put their cash to work and lend to each other, the economy will improve. I believe that we are within a short six months of the economy getting better. To give up the investment opportunity of a lifetime for only six more difficult months seems ill advised.
The stock market’s performance is a future indicator, as it typically experiences a turnaround and gets better before the wider economy. I am not certain when that day will come, but I believe it is very close. I recognize that this has been a difficult quarter, but I assure you that we are working hard to protect your investments. During this quarter, survival mode far exceeded investing fundamentals.
As the markets stabilize, we have the opportunity to move forward; I sincerely hope that investors will remain patient and wait for the good days to return. Best regards.
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