Weekly Recap Following Presidential Election

Tough Week, But Could Have Been Worse!
A tough week for the stock market as the S&P and NASDAQ both declined dropping 3.9% and 4.3% respectively. Volatility reemerged with swings of 5% or more on 4 out of 5 days. Frankly, we were not surprised to see a correction as the market had advance 18% over the preceding six days prior to the start of last week. The weekly decline would also have been a lot worse without the rally and gains on election day and Friday. The week brought more evidence of economic slowdown, but a recession should not be a surprise to anyone.

Easy To Be Glum
Reports last week provided more evidence of a deepening economic recession. Most retailers reported the worst October same-store sales in 35 years. The unemployment rate reached 6.5%, its highest level since March 1994. September factory orders declined 2.5% and the October ISM Services index fell to 44, both levels that clearly indicate a contracting economy. Jobless claims continue to rise and at 3.8 million are the highest levels in 25 years. It should come as no surprise to anyone that the economy is not doing well. However, the stock market was able to post gains on Friday, despite all of the depressing economic news. We view that as a sign investors had already accounted for the worst of the economic conditions. Oil prices decline again for the week which provides positive support to the market and indirectly increases consumer sentiment. Lower gas prices represent very real savings that are readily apparent to consumers and help to ease other economic burdens. We just hope that the bubble in oil prices does not return any time soon.

New President, Future Outlooks Uncertain
The big news for the week was clearly the election of the first African American as President of the US. The certainty of that decision lent support to the market and election day brought a strong rally. But future corporate outlooks continue to deteriorate. The most visible corporate disappointment was Cisco who warned that fiscal second quarter revenues were expected to decline 5-10% as large customers across all sectors face a very challenging business environment. This statement pretty much sums up the future outlook for many companies regarding the coming year. Ford and GM also reported major losses, raising concerns over their cash levels and wherewithal to avoid bankruptcy. Again, it should come as no surprise that many companies are pressured in these very difficult economic conditions. The President elect did suggest that the economy would be his number one priority, as talk began on additional incentives that would jump start growth and spending. We expect that corporate outlooks will continue to be challenged well into 2009, and this will weigh on any potential moves in the stock market. However, there will be some companies that hold their own and even thrive in this environment, and those are the companies we will invest in over the coming months. As for performance last week, all sectors were down last week with Consumer Cyclical and Financials the worst performers. The best performing sectors were Consumer/Non Cyclical and Healthcare, although they were also down -.7% and -1.3% respectively.

Volatility Demands Patience
Volatility will likely remain high next week as more companies report earnings and Obama moves forward with his administration appointments. In addition, the looming Nov 15 deadline for hedge fund redemptions may also contribute significantly to the volatility. The economy is not well and that will not change next week. We still believe that the market is at attractive levels, and that this is not the time to move to cash. That said one risk of concern is that the market could move down further on “bad appointments” on the part of the incoming administration. Some of the selections for cabinet positions may be market movers like the choice for the all important Treasury secretary. We hope that Obama is deliberate and insightful with his selections. Oil prices are always a wild card, and we hope the recent declines continue which relieves some pressure on consumers. Another major risk is whether the selling pressure returns that we saw in prior weeks, particularly from the Hedge funds. It could be a very volatile and difficult week if the selling pressure overwhelms the market with the Hedge Fund redemption deadline looming. Investors need to be patient, and perhaps even opportunistic in light of the current volatility. If the market moves strongly in one direction, there may be opportunities to play a bounce, as the market has intraday swings of 5% or more quite frequently. A good way to play these short term movements is by trading the market indexes or even options based on those indexes. Volatility can be very trying for buy and hold strategies, but it does offer opportunities for short term trading. Overall, we still think the economy has a long way to go before it gets better, but we think the market already reflects most of the bad news, with many stocks sitting at very compelling price levels. We are planning to invest some of our cash into stocks over the next few weeks as we find good opportunities, and would suggest that investors sitting on cash do the same. We are also going to look for more short term trading opportunities with the market indexes to take advantage of the high volatility in the market. Patience will reward the long term investor as positive momentum and confidence will eventually return. Despite the terrible market, all of our portfolios show positive returns since their inception, which is truly exceptional given that the corresponding market returns all show significant losses. Furthermore, our performance and portfolio returns stack up very well against our best competitors, many of which are not even beating the market!

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