The Nvest Market Blog, our current thoughts on the Street

Congress Must Act - Weekly Market Summary

posted 09.29.2008 at 11:15 a.m. by steve

Last week was a lousy one for the equity markets. When speaking of the bailout plan being debated in Congress, it seems as though we have a ticking time bomb with which each passing moment the equity markets are discounting a higher probability that a plan (first announced a week ago) will not be passed. Instead, what is occurring is more jockeying in Congress as we draw nearer to the election - no member of Congress wants to be held responsible for voting in favor of a plan that is not viewed favorably by his/her constituents. Everyone wants to get re-elected, making this a difficult and divisive issue in which to reach consensus. In the end, it is clear that this will have to be a bipartisan agreement as it is too big for one party to take most of the responsibility. It is our belief that some sort of bailout/buyout package will be agreed upon and look similar to what was first announced. Apparently, others agree. Last week, Warren Buffett agreed to make a $5 billion investment in Goldman Sachs. Heretofore, Buffett has avoided the financial sector, but in his statement this week regarding the decision, he indicated that the cash infusion was a vote of confidence in Goldman and a vote of confidence in Congress. The Buffett investment may signal a turning point.

One thing that investors agree upon, is that a bailout deal needs to be made fast to avoid significant damage to our economy. As we sit today, the credit markets are essentially frozen due to mounting uncertainty. The credit markets are essential for businesses who must fund daily operations with short-term borrowing. With the spigot of capital turned all but off, some businesses are idle in need of funding.

Today, the markets are again punishing equities on news that a bill has still not been signed. Early reports today suggest that the details of a plan are mostly agreed upon, and that the bill stands to make it to a vote early in the week. In our minds, the markets want something passed yesterday, but we are certainly on board with wanting Congress to get this thing right. As indicated in our market alert distributed on Friday, we do not view the proposed $700 billion plan to purchase illiquid assets from banks as being a bailout. Instead, we believe it could be very profitable to the Treasury and ultimately a zero-cost to taxpayers down the road. Care must also be taken so as not to reward executives of banking and financial firms who did not manage risk there should be no golden parachutes. Regardless, the plan feels more like a buyout, or asset purchase than a bailout. When a plan is agreed upon and the details are disclosed, the overall market should experience a rebound. However, it is likely that the initial rebound will fade as the economy has clearly weakened since we started the year and it will take some time to recover.

Tomorrow ends the third quarter, and we will begin our work to generate quarterly reports. The third quarter has not been an encouraging one to investors. Despite a slightly positive month in August on falling oil prices, the financial crisis seemingly came to a climax in September and sent markets into a state of panic. While headlines of bank failures may not be done, we are hopeful that with a government plan finalized, that the worst will be behind us for the banks and this crisis. We are additionally encouraged by the notion that the most recent government intervention appears to be more directly aimed at solving the problem: getting bad loans off the books of the banks.

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Mutating Financial Crisis

posted 09.26.2008 at 10:21 a.m. by bill

The financial crisis is mutating. It is not only pulling in all types of financial institutions (banks, brokerage firms, insurance companies, and Government Sponsored Entities (GSE)), but appears to be affecting some parts of the non-financial economy. The US economy has not to this point entered a recession, but the lack of money flow via borrowing from financial institutions will most likely cause the economy to slip into a mild recession. And, the recovery from a recession may be slow.

The mutating financial crisis, that has swallowed many high profile financial and brokerage firms, has required the Fed, Treasury and government to take drastic action. The US financial markets are going through the greatest peril in 60 or 80 years. As black as the current moment seems, the $700 billion bailout IS the action needed to remove toxic loans from financial institutions balance sheets and allow them to survive.

We are watching closely; we are monitoring closely; we are talking to many highly respected fund managers and strategists to gather current insights. We believe a terrible peril will be averted.

Please click here to read the full alert

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Hurricane Ike, A Blessing in Disguise - Weekly Market Summary

posted 09.22.2008 at 09:37 a.m. by steve

If you were without power, cable, phone and all forms of communication, or your attention was simply diverted to cleaning up last week following the wind storm from Hurricane Ike, you might think it that it was an uneventful week on Wall Street. The S&P 500, Nasdaq and Dow closed about the same as they started at +0.27%, +0.56% and -0.29%, respectively.

No communication would have been a blessing in disguise, allowing you to avoid worry over the financial markets. However, a quick look at the week will not do the journey justice - it was a roller coaster ride like we have not seen years. The markets dropped almost 5% on Monday, gained shy of 2% on Tuesday, fell another 4.5% on Wednesday, gained 4% on Thursday and soared nearly 4% again on Friday. To further illustrate the gyrations, at mid-day Thursday, the Dow was down 900 points from where it started the week, or 8%, before staging a massive upswing to conclude at almost break-even. Following the severe drop on Wednesday, a feeling of panic was ingrained in investors. Talk of money market funds breaking the buck (when the net asset value of $1 per share is violated) was common place, creating the threat of a run on money funds - a situation like the one which ultimately caused the Great Depression in 1929. Sellers ruled the day, driving prices of the financial sector (banking stocks) lower by double digits. During that time, we received many questions from clients about the financial health of Schwab, and their account security. This was a pretty easy question to answer; we had already talked with Schwab regarding their stability earlier in the week. Our conversations confirmed what we have known for years - that Schwab is different from the firms like Merrill Lynch, Morgan Stanley and Lehman Brothers. Schwab is conservative and has not been (and will not be) part of the financial wizardry (our term to describe the financial engineers of other firms who created new exotic securities and write derivatives in an attempt to repackage risk). Schwab is one of the few firms in the banking sector that has improved earnings over the last year amid the problems, and has been virtually unscathed by mortgage-related write-downs. Schwab money market funds are stable - your money is secure.

Indeed, it was a yo-yo week, where chatter about bank failures, a collapse of the US financial system and utter chaos ran rampant. It was capped off on feelings of hope, stoked by massive intervention from the government which included the guarantee and insurance of money market funds; a ban of naked short selling for some 799 financial companies; and a promise for creation of an entity like the Resolution Trust Company that will absorb toxic assets from banks books (such an entity would allow the write downs to cease and plug the ever growing black hole on bank balance sheets) and provide the banks with capital in exchange. The details of the government package have yet to be fully revealed, but it is stated by Treasury secretary Henry Paulson to be a bold intervention. The intervention will not come without a cost, currently estimated to be near $1 trillion! One thing that is certain - the rules and regulations for the American financial system will be rewritten. A host of new regulations will be devised and implemented with the intent of better managing risk and eliminating the type of risky loan and securities creation that defined the earlier part of this decade.

We hope that last week was one where you were able to keep a distance from the markets; it would have saved you much worry. We are certain that the bad news is not yet over (hopefully the worst news is now behind us). Last week certainly felt climactic, and it appears that good news might be around the corner. We understand that even the most recent bailout does not eliminate the possibility of a bank failure (like Lehman or Indi Mac). It should alleviate the problems that could have led to a systematic crash of the financial system. If you find yourself worried or exasperated, please give us a call. Nearly all experts agree that this is a financial crisis unlike any we have seen in decades; it is difficult navigating the waters. We would love to hear from you, and provide you with as much information as possible, and hopefully deliver peace of mind.

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Finally, All She Wrote!!!

posted 09.16.2008 at 11:49 a.m. by steve

The US Treasury is saying it has had enough of risk taking brokerage firms who didnt care, except for their own wallets. And, they are not going to bail out these Wall Street cats; they can figure out how to get out of their problems without tax-payer assistance. It does appear the financial crisis, which has been in slow motion, may now have seen hurricane Ike.

This is not to say the Treasury or Fed wants the financial system to fail, or that they want housing woes to wipe out hard-working, taxpaying citizens. But talks with Lehman Brothers over the weekend provided no assistance, and the end result was Lehman filing for Chapter 11 bankruptcy protection. And, Merrill Lynch will now be part of Bank of America. All of this comes one week after the Treasury placed Freddie Mac and Fannie Mae into conservatorship. Thus, not all financial institutions are too big to fail.

This will have meaningful consequences and implications for the future of the financial services marketplace. Of key importance to clients is that Schwab has never been like the Merrill Lynchs, Goldman Sachs, Lehman Brothers or others that developed securities and created all types of securities transactions to fill the appetite of investors of all sorts. Schwab does not have financial ties to Legman like some others; it is independent. Watching Schwab stock should provide witness to the fact that the markets do not see worrisome connections. You should not be wary of your accounts’ safety at Schwab.

Next, it is most difficult for us to make predictions about what the markets will be like tomorrow, the next few days or weeks. We should expect further turmoil in the financial markets and emotional selling can take prices of some securities to obscene levels. When the markets stabilize, which they will, and cooler heads prevail, investors (not speculators) will advance stock prices. The financial dominoes are bigger and closer together now. In the short term, confidence is lacking (by investors and between financial institutions as they avoid making loans of all kinds), but confidence will return.

We are holding cash, since late last year (and wish percentages were even greater); in addition most client portfolios also own bonds. Thus, stock market exposure is lighter than when we are fully invested. We expect to stay conservative for a while longer. We dont like to time the markets, rather we like to be long-term investors. But like you, we have not witnessed this type of financial institution turmoil before. We need to keep in mind the Fed, Treasury and government has instituted enormous policy response. Policy response works with a lag. And we expect more policy responses are likely.

If you harbor undue worries, please let us hear from you via phone call or email. We want to know how you are doing.

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Financial Crisis in Slow Motion Continues - Weekly Market Summary

posted 09.15.2008 at 8:52 p.m. by steve

The markets finished last week in slightly positive territory somewhat encouraging after the start of the week when it was announced that Fannie Mae and Freddie Mac (the two government sponsored entities backing over half of all US mortgages) were placed into a conservatorship (both now being run by the government). Several days last week, the market opened in one direction (up or down), only to reverse course and end the day in the opposite direction.

Several times this year we have entered the start of a new workweek with very bad financial news (lots of bad things happening on weekends). In March it was the collapse of Bear Stearns; then we had Fannie and Freddie; and now today we come to work learning that the face of Wall Streets investment banking landscape is changing quickly before our eyes. Today we learned that Lehman Bros. declared bankruptcy, Merrill Lynch has been purchased by Bank of America, and AIG is precariously teetering on the brink of failure amid mounting losses.

Throughout history we have seen various financial crisis serve as a springboard for the market. Time after time, a major bank failure, or financial crisis has preceded a positive turn in the market. The question remains, what financial crisis event will be that positive catalyst? What financial event will be the big one that ushers in brighter days, or indicates that the worst is now behind us. What event will signal to investors that the worst is now behind us? One thing is certain: the market will move higher well before news has turned good. With each new financial development, we are reminded that this financial crisis does in fact seem different. The difference is that this is a financial crisis in slow motion; it is really all the individual events, happening over a spread-out time line, that sum up the larger problem.

While today was a miserable day for the markets, it will be interesting to see if a policy response is on the way. While the Feds minutes most recently indicated that a Fed Funds rate hike was the next move, we are likely moving closer to another cut. The market has gone from expecting a hike, to now thinking a cut is the more probable next card. Perhaps this next move will be a dramatic one (perhaps another 0.50% cut). It is becoming more and more clear that the Fed needs to get banks lending again. Lending is how banks make money (banks borrow short term, and lend long-term). Until the yield curve becomes steeper (short rates are relatively low, while long rates are relatively higher), it is not profitable for banks to lend; a cut to the fed funds rate should help improve the slope of the yield curve and encourage banks to lend.

Until recently, the Fed has been reluctant to cut rates further due to inflation. The good news is that commodity prices, such as oil, have dropped substantially in the past 8 weeks. That should remove some of the inflation pressures, and assist the Fed in their decision. We continue to watch the markets closely, bearing all of the above in mind. If you find yourself worried, we need to hear from you. Hang in there (to steal a line from the new Batman movie, but which is definitely applicable here) the night is always darkest before the dawn.

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Alternative Investments

posted 09.12.2008 at 10:00 a.m. by steve

From time to time, we are asked about owning, or our thoughts about using investment alternatives in portfolios. We offer a few thoughts on that subject. Some of these thoughts were gathered from research we receive from Advisor Intelligence, who permits publishing their thoughts (in whole or part), but align with our own. Link: Alternative Investments

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GSE Bailout - Weekly Market Summary

posted 09.08.2008 at 11:21 a.m. by steve

The holiday-shortened week was a miserable one for stocks as traders returned from vacation and increased daily volume. It would seem as though the markets modest improvement in the final week of August was a false signal. During the first week of September, the S&P, Nasdaq and Dow slide -3.16%, -4.72% and -2.79%, respectively. The sharp movement lower appears to have been led by worries that the economy is weaker than recently believed. Those worries came to a head when the payroll and unemployment reports were released late in the week, and were worse than expected. A sharp selloff on Thursday led many to talk, including world-famous PIMCO bond manager Bill Gross indicating that his investment company no longer sees compelling value in the bond issues of Fannie and Freddie, and further commenting that it would be up to the treasury to become the lender of last resort for the government sponsored mortgage giants.

Apparently someone was listening, because yesterday the Federal Housing Finance Agency took over operation of the two GSEs (Government Sponsored Entities, Fannie Mae and Freddie Mac). The implications of this action are huge and will likely be looked at favorably by the stock market. Indeed, as we sit this morning, the market has surged over 1% on the news. Along with the encouragement, that the Government will not let the housing giants fail, it may also have other positive ramifications. The move should help to effectively lower mortgage rates. Additionally, government backing should improve banks willingness to lend to homebuyers. If banks become more willing to lend, we may very well see the housing market begin to stabilize, which has been and remains the focal point of this financial crisis.

In sum, we have seen the price of oil drop precipitously in the recent 6 weeks, from levels around $150 down to almost $100. Consumer confidence has shown signs of improving on lower fuel prices. Additionally, inflation, which has been higher than what the Fed deems comfortable, may subside if oil remains at lower levels. Now, we have seen a very important development in rectifying the financial sector with the bailout of the mortgage giants Fannie Mae and Freddie Mac. Should the development prove to be what the doctor ordered, brighter days for the market are not far off. Hang in there; do not hesitate to give us a call with questions!

Please take a moment to read our monthly commentary, Playing Hurt, added to the site today.

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Nvest News

posted 09.02.2008 at 12:50 p.m. by steve

Nvest Wealth Strategies is happy to announce two exciting developments in recent weeks.

Bill was selected to be a member of the Investment Advisory Committee for the Dave Thomas Foundation for Adoption. Created by Wendy’s founder, Dave Thomas, who was adopted as a child, the foundation seeks to increase the adoptions of children in North America’s foster care system.

Meanwhile, I (Steve) received notification of successfully passing the third and final level of the Chartered Financial Analyst (CFA) designation. The CFA Institute and charter program seeks to lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence.

Both developments are consistent with our ongoing pursuit to provide value and serve others, as well as enhance our investment experience and background. Please let us know if you would like more information on either of these items. Thank you for your continued support!

Dave Thomas Foundation for Adoption

CFA Institute

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Weekly Market Summary

posted 09.02.2008 at 12:32 p.m. by steve

Despite last week being a slightly negative performance experience for the stock market (S&P 500 down 0.73%), the markets closed the month of August higher than they started. The month was characterized by lower oil prices, renewed fears of financial institution instability (note Fannie Mae and Freddie Mac), and a deteriorating global economic outlook. Real GDP was revised upward for the second quarter to +3.3% year over year, bolstered by increased export activity. However, toward the end of the month, it seemed as though all news was negative.

While the markets did hold up, trading volume was extremely light (typical around the Labor Day holiday as many traders take vacation), giving investors little ability to discern whether or not the markets advance is meaningful. Whether it can it be sustained as we enter a new month in which trading volume picks up after the slower days of summer, or if traders take this as an opportunity to sell out of the market at prices generally better than a month ago, remains to be seen?

As we enter the final month of the third quarter, we are hopeful that oil prices will revisit levels not seen since the beginning of 2008 ($100 or less per barrel). Additionally, we would like to see progress in the financial sectors task of rebuilding balance sheets and resume lending activity. What should also be interesting in the months ahead is the election. While generally an uncertain time in terms of who will be our next president, both candidates are making a lot of promises to voters that build optimism, and could provide a stock market boost.

In the coming week, be on the lookout for our monthly commentary to arrive in your email. While sounding like a broken record at times, there is much evidence that a disciplined, long-term strategy to investing is rewarded with the passage of time. Give us a call if you would like to schedule a time to review your accounts!

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