Economic and Market Update for Advisory Clients | 2.16.09

Posted At : February 16, 2009 12:57 PM

Economic Update – New numbers

Market update – what to expect

Action item – Do you have CD’s coming due or cash/savings/money market? These just popped up – 7.40% on a 9 month bond available (for a very short time)

Economic Update:

Well more good news this morning, as the Department of Commerce reported the annual start rate in October was only 791,000 units, down -4.4% from September, the lowest in 50 years.  It should be noted that 50 years ago, the US population was less than half of what it is now.  The Department of Commerce also reported October building permits fell -12% from September, suggesting housing starts are going to decline further. This really is no surprise as I have been saying for a long while that housing is dead for years to come. I’ve given my reasons too many times, so I won’t bore you again here. Although just ask and I’ll go through it again

The good news is that the FED is meeting soon on December 16th. We should see a -25 to -50 basis point rate cut; bringing the target fed funds rate under 1.00%.  Although the financial impact would probably be minimal, the Fed is presumably hoping that a cut would help the markets by demonstrating their resolve to doing whatever it takes to get the economy moving and hopefully LIBOR down to normal levels. So far, despite a declining fed funds rate, most consumers and business borrowers are not seeing similar declines in their loan rates.  Not only is credit hard to come by, but rates remain stubbornly high.  For example, the nationwide average on a 30 year jumbo residential mortgage is stuck above 7 ½%, virtually unchanged for 2 months, despite the decline in Treasury rates. Banks just aren’t lending money which is killing the economy.

Market Update:

While this bear market is not the deepest, it may rank as one of the scariest. The bear market of 2000-2002 had a drop of -49.2%, that occurred over 2 ½ years. The current bear has a similar percentage decline but accomplished it in just one year, in fact setting a record for falling the most in a one year period. Moreover, the record volatility is driving us nuts. From October 2003 to January 2007, the benchmark S&P 500 Index experienced only two single day moves of 2%: a bullish period of rising prices and widespread complacency. What a difference a year makes. Today we see wide spread fear from toxic debt, bankruptcies and failures widespread, etc. And what has happened to volatility, it has gone through the roof. Since September 4th, a period of 2 ½ months we have experienced the S&P 500 Index moving by over 2% on 33 different days. That can make people fearful….and the market HATES fear.

However, there is some good news: the only time in history where the volatility was greater was 1933 preceding the bottom. The high volatility today is just as rare as the low volatility preceding the high in 2007. We will probably see the market’s volatility revert back to its mean. This will be accompanied by confidence slowly returning, lending resumes and the market has completed its bottoming process. Following the high volatility of 1933, the stock market went on a one year bull market rampage and gained +120%. No one can expect a move like that but it does happen. However, keep in mind that rallies can be fast and furious off major bottoms.

Yes, there is hope and a light at the end of the tunnel. Of course this period has been no fun for anyone. Grueling in fact (for me at least. I hope to see the sun sometime soon) and as you know, I am doing everything I possibly can. However, fear creates opportunities, and I just have to believe that we will look back at this someday as the buying opportunity of a lifetime.

Action Item:

Do you have CD’s coming due or cash/savings/money market? These just popped up.

7.40% YTM on a 9 month American Express (AXP) 07/30/2009, Non-call, Rated A1/A+. (Very limited supply.)

Give me a call if you’d like to talk

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