Market Commentary
12/14/2008
--- Further Improvement In The Credit Markets
This week the interest rate
for bank-to-bank loans (LIBOR) fell to its lowest level
in over three years, closing at 1.92%. This indicates that
banks are more willing to make loans, a crucial step to
improving the economy. The spread between LIBOR and 3-month
treasuries (the TED spread) also improved this week, closing
at 1.91%.
For the first time in 50
years, total household debt fell. Furthermore, consumer
savings rates have increased and market volatility has eased
somewhat. A higher savings rate won't help the retail sector
in the short term, but is a positive sign that the American
consumer finally seems to understand the importance of living
within one's means.
On Monday the Federal Reserve
opens a two-day meeting to determine its next move for the
federal funds rate. The majority of economists are predicting
a 0.5% rate cut.
12/10/2008
--- Signs Of A Market Bottom?
At market highs, extreme
optimism reigns supreme as the general investor consensus
is that things can only get better and the prevailing "fear"
is one of missing out on the anticipated additional gains
that seem to be just around the corner.
At market bottoms extreme
pessimism takes hold of investors as the consensus switches
to that of "as bad as things are, they will only get
worse." Signs of extreme pessimism have been appearing
more often lately, especially comparisons to the Great Depression.
Before falling prey to the media's constant barrage of gloom
and doom, take a step back and make realistic comparisons.
For example, gross domestic production (GDP) in the 4th
quarter of 2008 is expected to fall by 1.5%. During the
Great Depression, GDP fell by 30%. We are nowhere close
to that number now.
Unemployment comparisons
have also been blown out of proportion. The reality is that
as bad as unemployment is now, the number of job losses
would have to double to even approach the unemployment rate
of the 1981-82 recession.
But not everyone is predicting
the apocalypse. Wells Fargo CEO John Stumpf said he sees
signs that real estate prices may be bottoming. Considering
that the stock market almost always starts recovering before
the economy bottoms out, a stabilization of real estate
prices would greatly boost investor confidence.
To successfully time the
market, an investor must go against the prevailing opinion
by selling when everyone else is buying and vice versa.
That is why we are not proponents of market timing; very
few if anyone can consistently and accurately call market
tops and bottoms while simultaneously having the courage
to go against the prevailing investor mood. However, while
we are not calling a market bottom, long-term investors
can take heart that the odds are increasing that we are
close to a market bottom. Moving out of stocks now could
permanently damage long-term returns of one's investment
portfolio.
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