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| The collapse of Bear Stearns, Freddie Mac and Fannie Mae served as prelude to a crescendo, tumbling AIG, Merrill Lynch, Wachovia and Lehman Brothers as well. As these and other bastions of financial privilege and power fell, the global funding system began to buckle, breeching tried and true safe havens and bringing unruly governments to their knees – even ours. |
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| October 24, 2008 |
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October 24, 2008
“I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well.” - Warren Buffett, CNBC, October 10, 2008.
Seems as if this year's hurricane season hit the markets square-on, leaving portfolios battered, but not broken. Now with a breather between squalls, we can pause to share our view of the lay ahead.
Review:
The course of the past quarter traversed more once-in-a-lifetime meltdowns than we care to count. The collapse of Bear Stearns, Freddie Mac and Fannie Mae served as prelude to a crescendo, tumbling AIG, Merrill Lynch, Wachovia and Lehman Brothers as well. As these and other bastions of financial privilege and power fell, the global funding system began to buckle, breeching tried and true safe havens and bringing unruly governments to their knees – even ours.
Not in memory have conservative investors faced so many simultaneous challenges. At the first assault on credit quality, we switched out of many longer-term Government Agency securities into short-term U.S. Treasury bonds and bills supplemented with the proceeds from stock sales and maturing bonds. While the superior resistance of our high quality assets and defensive allocations gave brief assurance through the end of September that the race to preserve capital had been secured, October began with a thud and the slip in values accelerated. In this, fear fed on fear before a-day-late-and-a-dollar-short intervention in the credit markets could be arranged. Only the advent of coordinated global policy prevailed in halting the trend.
As we write this, the only certainty seems to be that economic growth will be disrupted for at least a pace. Events continue to unfold at a speed that leaves many in a jet-lagged daze, and conditions have seldom seemed more volatile as new rules, limits and superlatives – good and bad – are served up and smashed daily. While it seems certain that the long beneficial era of decentralization, deregulation, and privatization begun in the late 1970’s is broken, it remains unclear whether the intended course of socializing financial losses will meet its promise of restoring stability, confidence, and integrity, let alone growth.
Expectations:
So rather than hewing to illumine a solitary strategy in unsettled conditions, we find ourselves positioned to promise a flexible response amenable to either offensive or defensive course of action. For now, the risks from the financial sector, recession and the advent of unfolding fiscal policies appear priced into the market. Less clear is whether these prices reflect the possibility that the goals of more benign, stable markets fairly rewarding individual investors are met. Success in these efforts could encourage broader participation and higher values.
In the interim, we intend to emphasize newer areas for re-investment; broadening our coverage to include cyclically proven growth companies in Europe, the Far East, and beyond on a selective basis. These initiatives will complement our core domestic focus favoring climate change, innovative technologies, energy independence and a more competitive back-to-basics U.S. economy. Overall, we expect quality growth companies paying solid dividends and managing consistent earnings through good and bad periods will be recognized and deliver strong results. We expect to push in this direction as conditions stabilize and earnings visibility improves, but for now, a measure of patience seems in order.
Foundation:
Summing up, our efforts to date have preserved capital and now consist of healthy reserves, short-term bonds, and our smallest ever strategic position in stocks. Most portfolios reserves amount to nearly 35% or more of the Investment Plan levels for stocks – i.e., a 100% stock portfolio would have no more than 65% in the market. This conservative position serves both to stabilize values and allow opportunity to reposition for the next bull market at attractive prices. We believe the next few months will be critical to laying a solid foundation for long-term growth.
As always, we would recommend you take a moment to review your statements, your capital gains, and your Investment Plan to consider whether your defined objectives remain current. Please feel free to call and discuss these matters with us at your convenience, or drop us a note so that we can take them up at your next Annual Review.
James W. Mersereau, CFA, CIC
President
Daniel A. Kane, CFA, CIC
Managing Director
In compliance with Rule 204-2(a) of the Investment Advisors Act of 1940 we offer you a copy of our current Form ADV Part II as filed with the Securities and Exchange Commission. Please call us if you would like one.
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