Irrational Gloom Prevails

But We Continue To Beat The Market!

Another week of wrenching losses as the S&P lost 6.8% for the week and the NASDAQ lost 9.3%. We have seen worse losses over the past few weeks, but these declines just add to the fear and pessimism running rampant through the market. When will it end, are we reaching levels of Irrational Gloom? The volatility in the marketplace remains at record setting levels as investors run for the exit. But there were positive developments, although not enough to sway the market last week, could provide support for longer term improvement.

Another Volatile Week: Hopeful Signs Amidst Continued Fears

Last week was another volatile week of trading, with positive developments having no sway in the overwhelming selling pressure from the market. Much of the week was focused on deteriorating Global economic conditions and fears of a long lasting recession. Despite concerns over the economy, there were a number of positive developments including declining Libor rates, as well as lower 30 year bond yields now at their lowest levels since 1977. Lower borrowing costs should encourage credit activity and help unfreeze credit markets although that will take time. Oil prices also declined despite efforts by OPEC to shore up prices following their announcement of production cuts. Existing home sales rose 5.5% in September to the highest levels in 13 months, and rose 1.4% on a year over year basis, the first gain in over three years. The Federal Reserve announced the creation of a $540 billion Money Market Investor Funding Facility aimed at increasing liquidity in the important commercial paper market. The government also appears to be considering adding insurance companies to the troubled relief program. Despite all of these positive developments, the market could just not overcome the selling pressure from investors and their overriding fear and gloom.

Mixed Earnings Reports: Concerns Over Future Outlook and Overriding Selling Pressure

In corporate news, third quarter earnings reports remain in full swing. Earnings reports continue to be mixed, although the most future outlooks have been cautious given the economic turmoil. Unemployment claims remain high, and consumer sentiment remains at very low levels. More and more companies are announcing job cuts as future outlooks continue to deteriorate. The economy is clearly struggling and our view is that those challenges will likely continue well into 2009 further pressuring stocks. A big factor driving price action in the market is widespread selling by hedge funds and mutual funds to meet margin calls and redemption requests. We think this selling pressure will continue as high volatility continues to drive investors to the sidelines. In addition, many investors are sitting on big losses and with the tax year coming to a close, will likely add to the selling pressure by dumping their losers over the next two months. In industry news, all sectors showed negative price performance last week where the worst performing sections, Consumer Cyclical and Capital Goods, were down -13.79% and -11.11% respectively. The best performing sectors, although still negative, were Utilities and Energy which were down -.35% and -2.27% respectively.

Our Strategy: Avoid Panic Sells, Compelling Market prices, Look To Increase Investment

The stock market volatility and performance has been painful over the past 12 months. From October 2007 closing highs, the S&P and NASDAQ are down 44% and 46% respectively. The selling pressure has been extreme and Irrational Gloom has taken hold. The volatility in the marketplace remains at record setting levels and investors are running for the exit. There were positive developments this week with declining oil prices, lower credit rates, government measures to unfreeze credit markets, and rising home sales. Despite those developments, the stock market succumbed to the fears of global economic collapse and intense selling pressure from institutional investors and hedge funds. On a positive note, the market did not fall below the prior floor that was established on October 10. That could be a sign that a support base is forming at current price levels. But as we have said before volatility is simply too high, which makes it impossible to predict the short term direction of the market. We are still not ready to say that the stock market has hit bottom, but remain encouraged with the positive developments to stabilize the markets. As we mentioned last week, history suggests that past Bear Markets lost an average 39% from top to bottom, and the current market is already well past that number. Over the near term, the negative bias on market movements will likely continue until the selling pressure is exhausted including the redemptions from institutional and hedge funds, as well as investors taking advantage of favorable tax treatment on unrealized losses. Overall, we think that the economy has a long way to go before it gets better, but we do think that equities are beginning to hit very compelling price levels and are getting close to that bottom. In our view, now is not the time to exit the market. You should only sell a stock if you truly have a better stock investment. In fact, we continue to carry some losses that are larger than what we normally carry from our efforts to avoid the recent selling frenzy and oversold conditions. For those that are sitting mostly on cash, now may be a good time to gradually reenter the market by investing a portion of that cash each month. By investing funds over several months, investors can reduce their risk over market timing. Investors that try to wait for the market bottom will surely miss it! Despite very tough conditions, all of our portfolios show positive returns since their inceptions, which is truly exceptional given that the corresponding market returns all show significant losses.