2nd Quarter 2009
April 15, 2009
Cautiously optimistic…Emphasis on cautious
Out first quarter commentary reviewed what happened in 2008 and what must occur to have markets turn around:
1. Stabilization of credit and housing
2. Growth of earnings / Positive GDP
3. Confidence – Is this the start of another depression or the next bull market.
Perception
The DJIA is up 16.5% (3/31/09) from its low of 6440. (source: Yahoo.com)
Reality
Even with the rally, the DJIA is down 11.62% for the year (source: Marketwatch.com).
Now let’s address the last question. Are investors confident or is this the next depression? Quickly addressing the latter, let’s examine the programs and assets in place today. When the market crashed on Black Friday 1929, we did not have social programs like social security, Medicare, or 401(k) plans. We do now, so don’t expect to see breadlines on your television. In 1929, the Federal Reserve was established just 16 years earlier in 1913. Just as age and experiences provide us wisdom and maturity in our personal lives, time and knowledge gained from the past are providing today’s Fed Governors with the options to accomplish their task. Finally, the ’29 crash was intensified by a stock market bubble due to inflated stock prices. If this were 2000, one could make that argument but there is no speculative fluff in this market
So the question is, “Where are we?”
We have seen positive earnings from several financials (JP Morgan, Wells Fargo, and Bank of America, source: WSJ April 09), which is the industry that led us into this downturn. However, we do not think it is sustainable. A large portion of the profit has come from the liquidation of assets (ie. BAC sale of Chinese Bank) or abnormally high refinancing for qualified buyers. Lastly, we have seen a relaxing of mark to market accounting to increase their assets on the books. All positive signs but are they sustainable? Possible, but not probable.
We must have banks lending again and until TARP is repaid, that is not likely to happen.
Pretty dismal we know but let’s look at the last time banks were overleveraged. During the 1973-1974 bear market, 75% of all brokerage firms disappeared. (source: Google Finance) During that time frame, the market’s 5 year annualized return from 1973-1979 was 34.4%.
We are wading through this crisis, just like we did with the Savings & Loans, LBOs, conglomerates and hyperinflation. It will take patience and discipline but this time five years from now, or possibly sooner, we will be discussing the next bubble… Treasuries? Cash?
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