10/2/2008 - Third Quarter 2008
Market Swoon

Equity Overview

The worldwide equity markets have declined precipitously over the past two weeks and thus have brought with it sharp and devastating equity declines for the quarter ending September 30, 2008 in both the domestic and international markets. International markets have actually performed even worse than the United States equities with year to date retracements in the 36%- 57% range in Russia, India, and China alone, which comprise ¾ of the BRIC world growth powerhouse. Meanwhile, the fourth member, Brazil seems to be showing serious signs of strain (-22%). Unfortunately, international equities are more closely correlated to the US market when the US markets are in a period of decline. This along with the freeze up of world credit markets, has combined to form a perfect storm for investors, and has made our job extremely challenging and difficult to say the least, since no asset class has held up other than cash. Portfolio diversity in normal times lessens portfolio volatility and underlying market risk of a specific sector underperformance. Needless to say, these are not “normal” times.

Domestic Equity

The Russell 2000 index of small cap stocks actually performed the best during the 3rd quarter with a quarterly and year to date loss of just -1.46% and -11.29% respectively.

Year to date, the United States Broad Market has declined by -18.49%. The technology and small bank centered NASDAQ actually has performed the worst, recording a loss of -21.49% year to date.

The United States economic recovery package has just been passed on a second vote by the United States House of Representatives. After being signed by the President, this most likely will result in a stabilization of the credit markets which in turn should boost bonds and equities near term.

As forecasted in our last quarterly writing, Warren Buffet has indeed made preferable yet meaningful investments in General Electric and Goldman Sachs. In the meantime, previous financial titans, such as Washington Mutual, Countrywide, Lehman Brothers, Fannie Mae, Freddie Mac, Merrill Lynch, AIG and Wachovia have ceased to exist as significant independent public enterprises. The investment bank model no longer remains relevant to the new power line up of “government sanctioned” money center banks. The Treasury Department has clearly separated the wheat from the chaff, which is too important and relevant to fail, from those whom may no longer matter. Bank of America, Citigroup, JP Morgan Chase look to have come out on top and should be considered “money good” at this point in time. An announced late bid this morning for Wachovia, by Wells Fargo after at first being reluctantly paired with Citigroup by US Treasury indicates that the free markets are alive and well.

Bond Desk

The 10-year treasury ended the quarter with a current yield of 3.831%. Corporate notes appear to be a relative bargain with a current yield of 7.487 % (just don’t try to sell them). Year to date the Lehman Aggregate Bond Index has returned a stingy 0.63%.

Prime rate remains unchanged at 5%, and the rate tied to most corporate borrowings, LIBOR, has advanced 84 bpts in just one week to end the period at 4.05%, an indication of how tight credit actually has become.

Gold ended the quarter at $874 (actually down from $932) and light sweet crude at $100.64 per barrel. Both commodities had wild swings during the quarter providing added volatility in related listed stocks whose fortunes rise and fall in part based upon the price of the underlying commodity. In addition, the US dollar now shows signs of strengthening against other currencies, especially since the price of crude have declined by more than 30% from the high reached on July 11th .