Stock Market Recap, March 6, 2009

Fourth Week of Declines!

Ouch! Another very tough week as the broad market lost 7% in a fourth week of declines. Year to Date the S&P has declined 24% in just over two months and those declines come on the heels of nearly 40% losses last year. We reported our concern last week that volatility and fear was rising, and sure enough the market turned sharply down. We wish we could say the stock market is at bottom, but there is just too much fear and uncertainty to make that call. We continue to be concerned with the downside risk, as there are just not a lot of positives right now to drive the market sharply higher. In our view, the economy is a long way from recovery, and will likely continue to deteriorate in 2009 and perhaps into 2010. As reported last week, even if the market has hit bottom, the upside may be limited over the short term, whereas the downside risk remains high. In that light, we do not like the risk reward tradeoff for the long side of the market. Investors with long time horizons (5-10 years) could consider buying now, but even then we would suggest only slowly entering the market with incremental stock allocations over the next six months. In other words, if you want to resume investment in this market, invest 10% to 20% of your available cash into stocks each month. Investors do not need to hit the market bottom, to be successful over a long time horizon.

Economic Conditions Deteriorate!

The financials were the biggest loser last week as the sector dropped 19% as fears over financial health and nationalization continue to grow. Citigroup stock stoked nationalization fears as their stock price dropped below $1. Mortgage delinquency rates continue to rise sharply as the numbers mount on consumers unable to pay bills. The unemployment rate hit a 25 year high, rising to 8.1% as job losses grow across all industries. Economic data on Housing remains bleak and continues to deteriorate. The auto industry is a disaster as General Motors reported February sales sank nearly 53% with Ford sales dropping 48%. The losses at General Motors are huge, and bankruptcy concerns loom large. Retailers are also showing declines in monthly sales as consumers continue to tighten the purse strings. With all the bad news, it is tough to see the glass as half full. There needs to be more clarity from regulators on how toxic assets will be dealt with and how those remaining assets will be valued in the financial system. Asset valuation is a tall order for the Fed and Treasury to resolve, but may be critical to any meaningful and lasting recovery.

Market Beating Foresight

Next week the government is expected to review the mark to market accounting rules on the valuation of assets. Some speculators suggest that elimination of this rule will have a measurable and positive effect on the valuation of companies. Frankly, we do think adjustments to this rule will help ease the volatility in capital requirements caused by short term fluctuations in asset prices. The volatility in capital requirements creates short term liquidity problems that companies have struggled to meet in these tight credit markets. But we do not think that the mark to market rule will be the panacea that solves all of the issues with company balance sheets. There has been simply too much financial and credit excess built up over many years. There is no quick fix and it will take years and significant pain before the economy and financial systems eliminate that excess. The severe downturn in the stock market over the past year reflects the beginning of that recovery process, but we think there is still a long way to go. Again, the market is very shaky and further downside moves are still possible. We believe the market will remain rocky over the next three months as the future outlook continues to deteriorate and job losses reach critical mass. The retail sector reflects just how weak consumer spending is and we do not see consumer confidence returning any time soon. We are currently 20% invested in our stock portfolios. We will likely sit tight on that allocation until we see more optimism and strength in the market. As the market builds strength, our stock allocation will rise over time. For now, investors should remain cautious and very selective with any investments that are made.


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