Anxious Market Falls Again!

The S&P 500 fell again last week, losing 3.3% over the past five trading days. The NASDAQ did even worse losing 4% for the week. The level of anxiety in the marketplace particularly in the financial sector is very high which continues to pressure stocks.

The biggest news for the week was the news that didn’t come. There was no closure from Congress on the details of the Government bailout plan for housing and mortgage related assets. The plan, now a week in the works from when it was originally announced, first created optimism, but now has investors anxious as the delay in signing lengthens. Politicians are wrangling over the details and it is not clear how soon the plan will be passed, if ever, but there is hope for resolution prior to the start of trading this week. The President came out in a special address during the week to support the plan and provide market assurance that closure would likely come soon. The markets responded with a little more optimism over the next couple of days. We do think a version of the bailout plan will be passed, but like everyone else, are not sure what the details will hold or the longer term implications. We would be very concerned for the market if the plan is not passed.

In other big news, Washington Mutual was seized by regulators and became the largest US Bank failure in history, another indication of just how dire the conditions are in the financial sector. However, JP Morgan will likely be a big winner over the long term, as that company arranged for the purchase of WAMU assets from regulators for just $1.9 billion. For the banking system, this deal shifts the risk of defaults to JP Morgan and away from the FDIC whose funds continue to be pressured with the turbulence from the banking sector. The market also got some lift from Warren Buffet, a widely followed and renowned Wall Street investor, when he invested $5 billion into Goldman Sachs. In late trading on Friday, rumors surfaced that Wachovia was in talks with Citigroup, Wells Fargo, and Banco Santander on a possible deal. As for industry performance, all sectors were down for the week with the largest losses coming from Basic Materials (-9.5%) and Capital Goods (-6.3%).

The financial sector has replaced oil as the current mover and shaker of the stock market. The events in the financial sector have been truly remarkable over the past few weeks, and the shakeout is likely to continue over the near term. The financial sector is truly critical to a healthy and growing economy, something we are probably not going to see until this sector begins to show more stability and strength. In addition, the stock market has a very high correlation with performance in the financial sector, and we don’t think we are going to see a sustained rally in the market until the financial sector woes are under control. As we mentioned before, this is truly a traders market, where 5% swings over a day or two in both directions are occurring with great regularity. Traders can make a lot of money playing these short term price swings. However, that is not our strategy and frankly we have been more successful over the years sticking to our strategy and applying that consistently over the long term. We remain cautious over the direction of the market and the market continues to be very fragile. The financial sector is in great turmoil, and will likely remain very volatile over the near term. The US and Global economy are both struggling, which further pressures this fragile market. As we mentioned before, some of our losses on specific stocks are larger than what we usually tolerate and carry, as we try to avoid selling in the recent frenzy. Our goal is to beat the market, which we are currently doing despite overall portfolio losses YTD. Investors will gain in relative wealth even if they lose money as long as they lose less than the market. Given the current uncertainty, we will likely sit on our current cash and stock positions until the market trend becomes more clear.