Historic & Tumultuous Week!

The S&P 500 crashed, losing 18.2% over the past five trading days! The NASDAQ did only a little better losing 15.3% for the week. The level of panic and fear was clearly evident, with policy makers stepping up their efforts to provide stability and reassurance to investors. The behavior of the stock market and governmental actions taken over this recent period will likely write new material for the history books.

The biggest news again was centered on the financial sector and the economy. The bailout plan that was approved may have stemmed some bleeding, but it failed to jolt the market back on a positive course. Last week marked big downturns in global markets, as fear spread across the globe. In a remarkable event, Global central banks coordinated an emergency rate cut on Wednesday, but this dramatic action failed to move the market. In addition, the Fed announced plans to buy short term commercial paper in an effort to unfreeze credit markets, but this too failed to turned the market. Rumors now are surfacing that policy makers may target direct capital investments into financial companies to provide them much needed capital and liquidity. The government has taken and continues to take historic actions in their efforts to provide liquidity, unfreeze credit markets, and to improve confidence in the financial system. We think these measures will have impact over time, but short term the pain will likely continue. It is just going to take time to improve the conditions and confidence in the financial system.

In corporate news, it appears Wells will be the winning bidder for Wachovia. However, Citigroup may pursue legal action, which could prove costly. Headlines suggest General Motors and Ford may be teetering on bankruptcy, clearly a sign of extremely poor economic conditions. There are not many positives with the economy right now, and our own view is that those challenges will continue well into 2009 which will further pressure stocks. Oil prices have fallen dramatically over the past month, and for the most part that would normally be a positive sign. However, most pundits view falling oil prices as a sign of deteriorating global demand, evidence of Global economic decline. In summary, the current market woes and economic concerns are affecting all industries. All sectors were down last week with the largest losses coming from Energy (-24.8%) and Utilities (-20%). The best performing sectors were Conglomerates (-6%) and Transportation (-10%).

The events in the financial sector and stock market continue to make headlines. The stock market performance has been dramatic and painful for most investors. The volatility in the Marketplace is at historically high levels. The news is saturated with gloom and doom, with frequent comparisons to the great depression. The negative hype in the marketplace and the call for world collapse is starting to get extreme. A turning point in the market usually happens when we hit extreme levels on either end of the sentiment spectrum. However, we are not quite ready to say that the stock market has hit bottom. We are also encouraged with what is now a global effort to stabilize the markets and to provide short term liquidity to quality companies that need it. Overall, we think that the economy has a long way to go before it gets better, but we do think that equities in general are beginning to hit very compelling price levels. In other words, the stock market may be getting closer to that bottom. Of course, until money flows begin to return to the market, stocks will likely stay flat at best over the short term. Investors that are willing to take the risk and that can be patient over a longer holding period will likely be rewarded. Our goal is to beat the market, which we are currently doing despite overall portfolio losses YTD. All of our portfolios show positive returns since inception, while the market returns over that same period are negative. Investors should always put more weight on long term performance, as opposed to short term fluctuations. Some losses on our stocks are larger than what we usually carry, as we relaxed our stop loss rules to avoid the recent selling frenzy. Generally speaking, in our view, now is not the time to cut your losses by selling losers unless you truly have better investment opportunities.