A Remarkable Week

The S&P barely budged from the prior week close ending up last week only .3% suggesting perhaps that little happened. But that wasn’t the story at all as the events last week were truly remarkable. In addition, volatility and trading volumes hit extreme levels not seen in years.

The financial sector was the big story all week and the primary market driver. On Monday, reports on a Lehman bankruptcy, along with the fire sale of Merrill Lynch to Bank of America, and heightened liquidity concerns over American International Group drove the market down sharply 4.7%. The market did recoup some losses on Tuesday, but dropped another 4.7% on Wednesday following news that the FED agreed to provide $85 billion in loans to AIG for an 80% equity interest. The size of the loan and the stringent terms highlighted just how dire the financial issues were.

On Thursday and Friday, the market had another two days of dramatic swings. This time the market swung wildly up driven mostly by the short term ban on short selling financial stocks and the initial reports of a Government program to bailout distressed housing and mortgage related assets. The details of this program are not yet clear, and those plans will likely be discussed in more detail over the next week. However, there appears to be great urgency in Congress to get something through that will improve the liquidity of these assets and improve the credit conditions in the marketplace. The market responded with great hope that these issues would be addressed quickly.

From the low on Thursday to the high on Friday, the S&P rose a phenomenal 11.6% and the NASDAQ even more at 12%. Those gains were truly an amazing end to a remarkable week. However, volatility and trading volumes were also extreme, and that will likely continue over the near term. Those that sold in the panic selling on Monday and Wednesday lost even more ground to the market as it bounced back on Thursday and Friday. 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 that strategy and applying that consistently over the long term. We remain cautious over the direction of the market and the market is indeed very fragile. The financial sector is in great turmoil, and will likely remain very volatile over the near term. The crisis of the moment is the financial sector, yet the economy is also clearly struggling. 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. Given the current uncertainty, we will likely sit on our current cash and stock positions until the market trend becomes more clear.