4/4/2009 - First Quarter 2009

The first quarter 2009 ended with the domestic stock market (as indicated by the S&P 500) off by almost 12% year-to-date. While this extends the current bear market to 18 months, how we finished the quarter does provide investors with long-overdue confidence that the worst may be behind. After reaching a low of 666 on the S&P 500 (6547 on the Dow) on March 9th, the market has risen 24.5% thru Friday April 3rd. That being said, the DJIA had its worst first quarter in percentage terms since 1939, falling 13.3%. Ultimately, stocks in the broad market did put up their best month (March) since October 2002. In just 25 days the market moved up two and a half times the long-term annual return average of 10%. This is a clear illustration of why one cannot time the market.

However, as encouraging as the last several weeks have been, we believe it is still way too early to celebrate a new bull market. We are still in the midst of a severe global recession and we still have a long way to go to get back to the October 2007 market levels. As of this writing, the US unemployment rate has reached 8.5% and many economists say it could easily hit 10%. This recession is as deep as it is due to the three separate but interconnected crises: 1) the pop in the housing bubble (brought on by unsound lending practices, speculation and greed), 2) which caused the freezing up of the financial system (caused by deregulation, misalignment of interests and greed) and finally 3) the collapse in consumer demand.

Though we may not agree with many of the solutions Washington has put forth, few could argue that they have not at least tried to get the economy back on track (whether or not they should is a different argument). We will attempt to summarize what Washington has done and identify the intended rational of each Plan. 

TARP – First major program launched in 2008 and gave the Treasury the authority to purchase up to $700 billion of troubled assets from financial institutions. This proved a difficult and slow task so the original intentions were modified and it was largely used for recapitalization of banks ($168 billion), AIG bailout ($40 billion), Citigroup bailout ($25 billion), and the GM & Chrysler bailout ($13.4 billion). It certainly helped unfreeze the financial system, but fell short of its original intentions. It may have staved off a complete calamity.

TALF – Originally Announced in November 2008, the TALF allows the Federal Reserve Bank of New York (FRBNY) to lend up to $1 trillion (originally $200 billion) on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.