Last quarter’s market commentary ended with a prophetic question…“it can’t get any worse…can it?” Well, by most (OK…all) accounts, 3 rd quarter 2008 did not serve investors any better than the 2 nd. Equities struggled mightily as investors mulled over the never-ending credit crisis and assessed the new financial landscape.
The three major indexes now have fallen about 20% year-to-date and their global counterparts have fared no better. (Surprisingly, Bank of America and JP Morgan Chase were the Dow’s top two performers of the quarter.) The bearish mindset continued; employees worried for their jobs; retailers feared gloom and doom for the holidays.
Market Matters…
End of an Era: During the past quarter, the entire financial landscape changed dramatically. Merrill Lynch is no longer “Bullish on America ,” thanks to an acquisition by Bank of America (which also closed on the Countrywide purchase in early July). Freddie Mac and Fannie Mae essentially have been nationalized and are not merely “quasi-” governmental enterprises anymore. AIG, the nation’s largest insurer, is now owned by the gov as well as the global conglomerate was considered simply “too big to fail.” Lehman bid (a less than fond) farewell and moved into bankruptcy after its storied 158-year history (and left money market investors in fear for their safest assets). Citigroup, the one-time bank poster child for bad assets, somehow has emerged as among the strongest, and bought rival Wachovia (and up to $40+ billion of its losses).
Dare We Continue? Washington Mutual became the largest bank to fail and its assets were sold to JP Morgan Chase. Goldman Sachs and Morgan Stanley recognized that commercial banks were faring better than investment banks and received permission to become bank holding companies. Morgan Stanley subsequently sold a large chunk of itself to Japan ’s Mitsubishi UFJ, while Goldman received a significant $5 billion investment from Berkshire Hathaway (better known as Warren Buffett). For good measure, Congress decided to enter the fray, exercise leadership, and instill much needed confidence into the financial system. Instead, partisan bickering and fear for personal job security prompted the politicos to vote down a $700 billion government “bailout” that could have jumpstarted the healing process. The Treasury Secretary and Fed Chair claimed a “yes” vote would help ease the credit crisis and provide businesses and consumers with greater access to the near-frozen capital markets. Not last quarter, anyway.
Oil bubble bursting? The great energy debate over fundamentals vs. speculation raged on. After hitting $147/barrel in July, crude began a rapid decline and market fundamentalists said that the stronger dollar and weak economy were primary catalysts. Perhaps, but a 25% drop in just a few weeks (and a $25 surge after the initial bailout news) wreaks of speculation. Two Gulf hurricanes brought even more volatility to the markets. By quarter-end, crude had settled around $100/barrel and other commodities also moved much lower. In fact, coal, metals, and mining were among the worst performing sectors last period. One bit of optimism: the pullback in commodities could prove very positive on the future inflation front. After all...it can’t get any worse…can it?
Economically Speaking…
* Reflects changes in interest rates over various time frames.
Fed Chair Bernanke wasn’t left to tackle the economic battles alone this quarter as Treasury Secretary Paulson joined the fight in a far more significant manner. While analysts (and many politicos) questioned the active role the government has taken in attempting to relieve the credit crisis, both men have warned that the (bailout) measures are indeed necessary to prevent further collapse and hinder the prompt emergence of recession (or, dare we say, depression). As banks continued to write down massive assets and fight for their lives to survive (many have already lost), businesses scramble to meet short-term funding needs in order to make payroll and cover daily operations. The commercial paper markets (short-term corporate borrowing) have all but dried up, and the Fed and the world Central Banks have been forced to inject significant liquidity into the banking system. The Fed chose to leave fed funds unchanged at 2% during the quarter and speculation centers around future rate cuts by year-end (as opposed to the hikes that were predicted just a few months ago). As the global economies struggle alongside the United States , the demand for “Made in America ” goods and services may also decline.
Inside the numbers… The data of the past three months tells a rather gloomy tale. On the labor front, the unemployment rate climbed to its highest level in almost five years as over half a million jobs have been lost in 2008. Housing showed no signs of a rebound as construction spending declined for the 16 th straight month and new homes sales reflected its slowest rate of activity in 17 years. The struggling automakers (and weakness among our trading partners) threaten any future growth in manufacturing. And the National Retail Federation expects this holiday season to be the worst in six years. Still, GDP grew by 2.8% in the 2 nd quarter (thanks to the economic stimulus package), so talks of recession might be a bit premature (at least, for now). Additionally, the new inflation picture represents the one silver lining in the economy as declining oil (and other commodity) prices prompted the first decline in the CPI in almost two years. Should energy continue to fall (or even just remain at these levels), Bernanke and friends can focus exclusively on the weak economy without much concern about price pressures.
On the Horizon... The upcoming economic releases are less significant than the actions taken to relieve the credit concerns. Data may remain weak in the short-term, but the decisions of the next few days, weeks, months will help dictate the future. The Administration and Congress must put partisanship aside (even in an election year) and make the tough decisions that instill confidence back into the financial system. (Energy prices have cooperated lately…one less thing to worry about.) Confidence is the key to a turnaround; without it, the global economy will continue its downward spiral. Banks must have confidence to lend; businesses and consumers must have confidence (and ability) to borrow and spend; investors must have confidence to put those hard earned dollars to work in functioning markets. Leadership has never been more important. November 4 th is just around the corner. Are you up to the task, Senators McCain and Obama?
The three major indexes now have fallen about 20% year-to-date and their global counterparts have fared no better. (Surprisingly, Bank of America and JP Morgan Chase were the Dow’s top two performers of the quarter.) The bearish mindset continued; employees worried for their jobs; retailers feared gloom and doom for the holidays.
Market Matters…
| Market/Index | Year Close ( 12/31/07 ) | 1 st Qtr Close ( 03/31/08 ) | 2 nd Qtr Close ( 06/30/08 ) | 3rd Qtr Close ( 09/30/08 ) | Qtr Change | YTD Change |
| Dow Jones Industrial | 13,264.82 | 12,262.89 | 11,350.01 | 10,850.66 | -4.40% | -18.20% |
| NASDAQ | 2,652.28 | 2,279.10 | 2,292.98 | 2,082.33 | -9.19% | -21.49% |
| S&P 500 | 1,468.36 | 1,322.70 | 1,280.00 | 1,164.74 | -9.00% | -20.68% |
| Russell 2000 | 766.03 | 687.97 | 689.66 | 679.58 | -1.46% | -11.29% |
| Fed Funds | 4.25% | 2.25% | 2.0% | 2.0% | 0 bps | -225 bps |
| 10 yr Treasury (Yld) | 4.04% | 3.43% | 3.98% | 3.83 | -15 bps | -21 bps |
End of an Era: During the past quarter, the entire financial landscape changed dramatically. Merrill Lynch is no longer “Bullish on America ,” thanks to an acquisition by Bank of America (which also closed on the Countrywide purchase in early July). Freddie Mac and Fannie Mae essentially have been nationalized and are not merely “quasi-” governmental enterprises anymore. AIG, the nation’s largest insurer, is now owned by the gov as well as the global conglomerate was considered simply “too big to fail.” Lehman bid (a less than fond) farewell and moved into bankruptcy after its storied 158-year history (and left money market investors in fear for their safest assets). Citigroup, the one-time bank poster child for bad assets, somehow has emerged as among the strongest, and bought rival Wachovia (and up to $40+ billion of its losses).
Dare We Continue? Washington Mutual became the largest bank to fail and its assets were sold to JP Morgan Chase. Goldman Sachs and Morgan Stanley recognized that commercial banks were faring better than investment banks and received permission to become bank holding companies. Morgan Stanley subsequently sold a large chunk of itself to Japan ’s Mitsubishi UFJ, while Goldman received a significant $5 billion investment from Berkshire Hathaway (better known as Warren Buffett). For good measure, Congress decided to enter the fray, exercise leadership, and instill much needed confidence into the financial system. Instead, partisan bickering and fear for personal job security prompted the politicos to vote down a $700 billion government “bailout” that could have jumpstarted the healing process. The Treasury Secretary and Fed Chair claimed a “yes” vote would help ease the credit crisis and provide businesses and consumers with greater access to the near-frozen capital markets. Not last quarter, anyway.
Oil bubble bursting? The great energy debate over fundamentals vs. speculation raged on. After hitting $147/barrel in July, crude began a rapid decline and market fundamentalists said that the stronger dollar and weak economy were primary catalysts. Perhaps, but a 25% drop in just a few weeks (and a $25 surge after the initial bailout news) wreaks of speculation. Two Gulf hurricanes brought even more volatility to the markets. By quarter-end, crude had settled around $100/barrel and other commodities also moved much lower. In fact, coal, metals, and mining were among the worst performing sectors last period. One bit of optimism: the pullback in commodities could prove very positive on the future inflation front. After all...it can’t get any worse…can it?
Economically Speaking…
* Reflects changes in interest rates over various time frames.
Fed Chair Bernanke wasn’t left to tackle the economic battles alone this quarter as Treasury Secretary Paulson joined the fight in a far more significant manner. While analysts (and many politicos) questioned the active role the government has taken in attempting to relieve the credit crisis, both men have warned that the (bailout) measures are indeed necessary to prevent further collapse and hinder the prompt emergence of recession (or, dare we say, depression). As banks continued to write down massive assets and fight for their lives to survive (many have already lost), businesses scramble to meet short-term funding needs in order to make payroll and cover daily operations. The commercial paper markets (short-term corporate borrowing) have all but dried up, and the Fed and the world Central Banks have been forced to inject significant liquidity into the banking system. The Fed chose to leave fed funds unchanged at 2% during the quarter and speculation centers around future rate cuts by year-end (as opposed to the hikes that were predicted just a few months ago). As the global economies struggle alongside the United States , the demand for “Made in America ” goods and services may also decline.
Inside the numbers… The data of the past three months tells a rather gloomy tale. On the labor front, the unemployment rate climbed to its highest level in almost five years as over half a million jobs have been lost in 2008. Housing showed no signs of a rebound as construction spending declined for the 16 th straight month and new homes sales reflected its slowest rate of activity in 17 years. The struggling automakers (and weakness among our trading partners) threaten any future growth in manufacturing. And the National Retail Federation expects this holiday season to be the worst in six years. Still, GDP grew by 2.8% in the 2 nd quarter (thanks to the economic stimulus package), so talks of recession might be a bit premature (at least, for now). Additionally, the new inflation picture represents the one silver lining in the economy as declining oil (and other commodity) prices prompted the first decline in the CPI in almost two years. Should energy continue to fall (or even just remain at these levels), Bernanke and friends can focus exclusively on the weak economy without much concern about price pressures.
On the Horizon... The upcoming economic releases are less significant than the actions taken to relieve the credit concerns. Data may remain weak in the short-term, but the decisions of the next few days, weeks, months will help dictate the future. The Administration and Congress must put partisanship aside (even in an election year) and make the tough decisions that instill confidence back into the financial system. (Energy prices have cooperated lately…one less thing to worry about.) Confidence is the key to a turnaround; without it, the global economy will continue its downward spiral. Banks must have confidence to lend; businesses and consumers must have confidence (and ability) to borrow and spend; investors must have confidence to put those hard earned dollars to work in functioning markets. Leadership has never been more important. November 4 th is just around the corner. Are you up to the task, Senators McCain and Obama?
