Capitulation

Stocks trade on three things:

1. Fundamentals (earnings)
2. Technical (charts)
3. Market psychology (fear and greed)

This market represents fear.

The massive deleveraging of financial firms and market repricing is hopefully nearing an end. Let's hope today is "capitulation". In the stock market, capitulation is associated with "giving up" any previous gains in stock price as investors sell equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.

After capitulation selling, it is thought that there are great bargains to be had. The belief is that everyone who wants to get out of a stock, for any reason (including forced selling due to margin calls), has sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that true capitulation is the sign of a bottom.

Here's the good news. On average, earnings have been good. You can go to CNBC's website and look at the earnings surprises. They have been overwhelmingly positive. However, companies are starting to guide that next quarter's outlook is not looking so rosy. Based on the economic data available to us today, we do not see a slow down lasting a long time.

We have low interest rates, low inflation, and relatively low unemployment. Now, we are starting to see improvement in the credit markets. Policy actions are just starting to come on-line with more to come. The Fed should act very decisively next week when its commercial paper market facility kicks in. The Federal Reserve announced back on October 7th that it was creating a special purpose vehicle to purchase 90-day commercial paper directly from eligible issuers. This creates liquidity for big US companies.

A few years from now, investors sitting on cash, will look back on these days as the greatest lost opportunity. Over the long haul, long-term stocks have done better than any other asset class. While this may not be the absolute bottom, equities are on sale, and today, they may be heading for the "clearance rack".

We still advise you to stay the course. If you have cash on the sidelines, you may want to consider making some buys.

Proverb

"Just when the caterpillar thought the world was over it became a butterfly."

Let's hope this proverb applies to our stock market! 

September Market Commentary

History is repeating itself!

Lehman was the largest bankruptcy in our country's history. It was larger than the previous nine largest combined; it was just a few weeks ago, now it's a passing thought.

The news keeps coming out faster than Wall Street can digest it. Wall Street doesn't like uncertainty. We are feeling the effects of that now.

Back in the late 80s and early 90s there was plenty of scandalous news. You might remember some of these stories.

• The crisis of the Savings and Loans (S&L) industry.
• Ivan Boesky-prosecuted for insider trading.
• Salomon Brothers-caught submitting false bids to the U.S. Treasury. Their story is documented in Michael Lewis' book-Liar's Poker.
• Drexel Burnham Lambert-driven into bankruptcy in the 1980s by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken.
• Michel Milken a.k.a. "Junk Bond King"-Drexel employee who was sent to prison on finance-related charges.

These stories dominated the crisis of that day. This current mess is a re-occurring nightmare from the past. The names might have changed, but the greed hasn't.

From 1986 to 1995, the number of US federally insured S&L in the United States declined from 3,234 to 1,645-a 50% decline. Ironically, it was due to unsound real estate lending. Many other banks failed for other reasons.

Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance.

During the S&L crisis, the government created the Resolution Trust Corp. Now, they want to form the "Resolution Trust Bank". A structure that will buy illiquid assets, mainly mortgage related, to create liquidity within the system.

We are fortunate to have Ben Bernanke, a scholar of the 1930s and the Great Depression, as well as Henry Paulson, one of Wall Street's most respected leaders, at the helm of this crisis. Even though the politics of the day voted down yesterday's plan, we'll eventually see a workable plan.

Even through all of this, our nation, economy and capital markets have survived. Even thrived!

We have seen a breakdown of this magnitude before. We will get through this one.

Tips to Thrive During Economic Turmoil

Tips to Thrive During Economic Turmoil

Now would be a good time to use your yoga breathing.

We are in the middle of turmoil in the financial market. It’s not fun.

At times like these it’s important to have some perspective.

The stock market is still over 10,000.  In 2002, it was at 7,500.  In the early 80s, it was at 750.

Nationally, unemployment is at 6.1% today.  In the early 80s, it was 11%.  During the Great Depression of the 1930s, it was over 20%.

Core inflation has been ranging between 2-3%.  In the 70s, it was double-digit inflation.  It was dramatic, and it was dubbed "hyperinflation".

Depending upon where you live, home prices have declined by 10-20+%.  They are 50% higher than they were at the start of the decade. Plus, the 30-year mortgage rate today is about 7% in the early 80s it was as high as 18%.

Okay, here are some ways to take positive action.

·      Turn off the TV! It’s not healthy to watch channels like CNBC 24/7. Journalists, like markets, suffer from the herd mentality.  They very rarely report on the good things but rather the news that increases their ratings or sells more papers.

·      Check that your bank accounts are federally insured. The Federal Deposit Insurance Corporation insures $100,000 per account holder at one institution.

·      The National Credit Union Administration (NCUA) is the federal agency that administers the National Credit Union Share Insurance Fund (NCUSIF). Which, is a federal insurance fund backed by the U.S. Government. They insure $100,000 per account holder at one institution.

·      Make sure your brokerage account is SIPC guaranteed. Securities Investor Protection Corp. protects up to $500,000, including $100,000 in cash. Most brokerage houses offer additional supplemental insurance as well.

·      Tighten your belt. Remember, it’s not what you make but what you keep. Now is the time to examine your budget and cut out any non-essential expenses. Stop worrying about the Jones! They are not doing as well as you might think.

·      Create a rainy day fund. It’s important to have a savings account that is equivalent to three to six months of living expenses.  This money should never be invested in the stock market. It should be kept in a place where you can have immediate access to it.

·      If you need your money in the next 1-2 years—it should be in a bank product like a CD that’s insured, not in the market. This is a rule to follow all the time.

·      If you are a long-term investor, stocks are on sale. It’s not a time to speculate however it might be time to dollar cross average into the market or purchase some high quality individual stocks.

·      Take some losses and put then in the bank. If you own really good companies it may makes sense to hold on to them; however if you own stocks or mutual funds where the underlying fundamentals are not longer strong or a match for your investment plan. Sell. Do not wait for them to recover. That money will work for you better in another investment opportunity.

Making money decisions under panic is never smart. The key is to remain calm.

It is likely we will continue to experience a bumpy ride for the foreseeable future. Make sure to stay vigilant about your own personal situation.

Discovering Value off the Beaten Path

I sent a last minute call to a good friend and great wholesaler Bob Leahy to see if I could meet two of the asset managers he represents.

Bill: “Bob, sorry for the last minute call. I’m going to be in Kentucky tomorrow. Can you arrange meetings with Andrew Beck from River Road and Tony Weber from Veredus?”

Bob: “Let me see what I can do”.

Bill: “I know Tony Weber / Veredus story. I want to make sure he’s sticking to his process in this miserable market.”

Bob: “Veredus has an open door policy; you’ll be more than welcome”.

Bill: “I’ve been watching River Road from a far. They’re numbers are great. I need to know their story.”

Bob: “Let me see what I can do.”

As always, Bob came through.

As I drove around downtown Louisville looking for River Road Asset Management, I wondered how many other advisors fly around the country looking for value. Couldn’t I just do a conference call like most advisors?

I showed up at their offices with a set of prepared questions. Like a reporter looking for a flaw in their story, I’d find out for sure if this was a boutique money manger.

As I sat in reception, River Road had posted in big letters on the wall, “Discovering Value, Off the Beaten Path”. Great tag line, I’ll need to borrow that one from time to time.

I got the tour of their office and was pleasantly surprised by two things. A board room table that was easily converted to a billiards table (I guess I want one of those for my office) and all employees were from the Kentucky area, even the CFAs and portfolio managers (Kentucky accent is hard to miss). I was expecting Wall Street types and ivory leaguers that were transplanted to Louisville. I was told that you had to be from the area to work at River Road. They want long term employees. I guess the typical blue-blood Yankee types don’t last long in Louisville. Interesting culture, hidden value possibly?

I received thorough presentation by Andrew Beck. Impressive, boutique to the core! Identifiable edge, structured sell discipline, unique story. River Road is able to find value in undiscovered, under-followed, and misunderstood companies via an absolute value strategy. If I were fishing for boutique money managers, I just caught another one.

Time was running short. I needed to get on the highway, head north, visit Veredus, and find time to procure some fine bottles of bourbon (another value quest) before heading back to Boston.

Not being from Louisville, the directions I had for Veredus was hard to follow. Had they told me of their proximity Ruth Chris Steak House, I would have found it instinctively, oh well.

I’ve been a fan and a client of Veredus for quite some time. I know their story, and have always been impressed with Tony Weber. I have had many meetings with the Todd Patterson (Director of Marketing) from Veredus, but had never met the master fund manager of Veredus Aggressive Growth and Veredus Select Equity.

Over lunch, I was schooled on theory earnings momentum. I probed for weakness in the theory, especially in this current volatile environment. “I been doing this successfully since 1980, I’m not changing my strategy”, stated Tony. Upon completion of presentation, I was more than convinced

The conversation quickly switched to bourbon (by me of course). The quest for bourbon began. Tony sent me to a secret location. I was to ask for John Smith (name changed to protect the innocent). Tell him, “Tony sent you”. Jackpot! 8 bottles of the finest, single barrel bourbons made their way back to Boston. Unfortunately, I need to check my luggage. Smuggled 8 bottles home, 7 made it all the way. One crashed and we had many unhappy pieces of luggage smelling like bourbon. Oh well!

What the hell is a boutique money manger?

While on a recent boat trip with friends, I was discussing the joy of finding some new boutique money mangers.

“What the hell is a boutique money manager”, asked my friend. I had never really had to explain it before; it was just an innate style that my firm had come to appreciate.

I took a sip of my Harpoon Ale, and said, “Here’s what its not: it’s not Fidelity, Federated or MassMutual. It’s not a company with a fund for every flavor under the sun. And, it’s never located on Wall Street. Boutique managers live off the beaten path. They have uncanny methods for managing money. They are disciplined and patient. They don’t rely on hunches, but stick to criteria. Most importantly, their performance is excellent and consistent”.

Hope that answers your question.

Wholesalers

A day in the life of a Certified Financial Planner® consists of meetings with fund managers and “wholesalers”. In our industry, fund managers are rock stars. Sometimes they are hard to get meetings with. Some are accessible while others consider themselves elite. Frankly, we will not deal with the latter mucky-mucks.

Mutual fund companies rely on wholesalers as informational conduits or inside technical sales force to distribute their products to financial advisors. Wholesalers are very bright, highly trained, financially savvy, and articulate. They are the gatekeepers of information. I could not do my job without them.

Advisors do a considerable amount of analytical work identifying great fund managers. However, true value isn’t always found in analytics. Great mutual fund managers have a disciplined process, an identifiable edge. Analytical services such as Morningstar® can’t always ferret out that process. Advisors need to go digging for these great managers, and wholesalers are the gateway to the gold.