DOWN BUT NOT OUT! THE FINANCIAL CAPITAL OF THE WORLD HAS BEEN HUMBLED, BUT NOT DESTROYED!
Market WatchI ended my summer newsletter with the following assessment of where our economy was heading. It was written before talk of the
Emergency Economic Stabilization Act of 2008, which became law on October 3, 2008. “With all of the stresses on the US economy, confirmation of a recession could become a reality either in the second half of this year, or early in 2009. The healing process necessary to recover from the mortgage fiasco and oil shock is underway.”
There is no doubt that anger, frustration and fear are feelings that are being experienced by many of us as we’ve witnessed the deflation of the housing bubble and the subsequent credit crisis which culminated in the emergency relief plan mentioned above. It is important to understand that many economists think this period will be labeled a recession, when the dust has settled and the
National Bureau of Economic Research (NBER) assesses the situation, some time in the future. Meanwhile, we are faced with the here and now and surviving this period, while planning for the recovery.
It is important to understand how we got here in order to avoid the same mistakes in the future. The initial media reaction was to blame Wall Street for this fiasco, but as events play out, it is being understood the blame can be equally placed on the shoulders of government, as well as many of the citizens of this fair land who used the equity in their homes as a bank, and stretched for outsized gains on their investments.
At the heart of the matter sit the two
Government Sponsored Enterprises (GSE's) Fannie Mae and Freddie Mac. By being a GSE these companies were treated like they had the full faith and backing of the Federal Government, even though they didn't. A little history helps to understand the dilemma.
Fannie Mae was created by the government during the Great Depression to buy mortgages, which they guaranteed with the full backing of the government. In 1968, President Johnson structured Fannie Mae as a government sponsored enterprise, without the guarantee. In the 1970's, Freddie Mac was created and the two quasi public entities began buying mortgages and packaging them into securities, which were purchased by banks, investors, governments and others around the world, because of the “implicit guarantee” that if anything went wrong, the US government would back the securities. Fannie and Freddie were also encouraged by the government to increase lending for subprime mortgages in order to advance the government’s agenda for “affordable housing”.
As we all know by now, the two GSE's did fail, and while the reasons are varied, the implicit guarantee is now an explicit guarantee. Furthermore, the actions of Fannie Mae and Freddie Mac made housing more expensive, not more affordable!
The ensuing credit crunch has had a chilling effect on the stock market, which has not been very pretty this year. At the end of the third quarter, the DJIA was 10,850.7, the S&P 500 clocked in at 1,164.74 and the NASDAQ finished at 2,082.3. All of the indices are in bear market territory and down significantly for the year.
There will be some false starts and possibly some more gut-wrenching ups and downs, especially as the election bears down on us. Fortunately, all bear markets end, just as their counterparts do. Usually, when you least expect it!
Economic Outlook Regardless of your feelings about the government rescue plan and where the fault lies, the reality of the situation is that the government has chosen to clean up a mess it helped create. The implications for the broader economy remain to be seen, but one thing is for sure, the road to recovery will be bumpy and prolonged. While it is generally believed the current crisis is not over, general consensus is that it is beyond halftime, to use a football metaphor, and possibly in the fourth quarter. I doubt very much the recovery will be instantaneous, even with the recent government actions. Look for a period of extreme volatility as we decide on a new President.
When the news is all bad, and the media paints a dire picture of the future, it is difficult to take the steps which could help you to benefit from the current financial landscape. Those of you who are investing in retirement plans or other investment accounts on a monthly basis, are picking up shares at a discount. While your account value may be down, once the market begins to rebound, the value of your account will increase rapidly, reflecting the increased number of shares you own. If you are not regularly contributing and have some available cash, the next several months should be a good time to add to your account, but I would caution against making a large investment at once.
To help you conquer investing phobia, consider this study by Psychologist Paul Slovic of the University of Oregon. In 2001 he had investors estimate the performance of their portfolio over the next 12 months and the decade to come. Only 6.7% of investors expected a zero or negative return in 2001 and only 1.3% thought they’d have no gains over the next 10 years. He asked investors the same question on September 29, 2008 and 36% of investors saw no profits for the current year and 5% predicted their portfolios would go nowhere for the full decade. Obviously, investors view of the next decade is being shaped by events of the last few days. Looking backward at where the market has been is a surefire way to ensure you will miss opportunities going forward. According to Jason Zweig, author of the Intelligent Investor column in the Wall Street Journal, “You need only two things in order to have an edge in today’s market: cash and courage”.
While the current economic situation seems challenging, the actions by the Federal Reserve and governments around the world will prevent the doomsday scenario of global depression. History will be the judge as to the severity of today’s difficulties, but lessons learned during the Great Depression indicate no government action can be catastrophic. I’ve opted to suspend consolidated statements until the year’s end, so call me to discuss quarterly statement concerns.
Protecting Your Assets In a Down MarketFor those of you invested in the Transamerica and MetLife Annuities, I want to remind you about the Guaranteed Minimum Income Benefit on your account which protects the assets so your account will continue to grow in a down market. Look for the line item GMIB, Income for Life or Managed Annuity Program to ascertain this value. While the market value reflects the turmoil in the stock market, the beauty of these products is their insured value during times of market upheaval. These products help to protect your assets and are an especially good investment for retirement assets. While nobody likes to see losses in value, it is reassuring to know these products have protection against downside risk and that insurance companies must have adequate capital in reserve.
Investment Advisory Services offered through:
Jersey Benefits Advisors
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Jersey Benefits AdvisorsSecurities offered through:
Transamerica Financial Advisors, Inc.
A registered Broker/Dealer
1150 S. Olive St. Suite T-25
Los Angeles, CA 90015
800-245-8250
Member FINRA & SIPC
Third Party Administration and Insurance Services offered through:
Jersey Benefits Group, Inc
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Jersey Benefits Group, Inc. John H. Kaighn
Jersey Benefits AdvisorsThe Kaighn Report
