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July 8, 2009
The good news is that we seem to have averted a total meltdown of the financial system. Last fall we came very close to a shutdown of the financial markets. There was a run on money market funds, the commercial paper market stopped functioning, banks refused to lend, and the solvency of virtually every major financial enterprise was questioned. It has taken a little time, but fear of systemic failure has abated. Our markets are functioning once again, though banks are lending only grudgingly.
The bad news is that while things don’t seem to be getting much worse, they also don’t seem to be getting better. The “stimulus” program isn’t stimulating. At best, housing is leveling off in some regions. Unemployment continues to increase, consumers aren’t spending and corporate America isn’t investing. Federal government deficits are so large, well-founded fears of inflation are returning. State and local governments are struggling to balance their books. California is making some payments by issuing IOUs!! Taxes will be increasing.
Low interest rates aid those who are indebted, but are causing extreme duress for retirees and those living off of fixed incomes. Treasury bill rates remain below one half of one percent and bank CDs pay less than two percent. For investors who are shunning stocks because they can’t stomach the volatility and have lost faith in the stock market, there is no safe haven that offers any return. We urge these investors to hang in there. Higher rates are in the future. Now is not the time to lower your standards.
It’s interesting that lower quality assets far outperformed higher quality assets in the 2nd quarter. Junk bonds had an outstanding quarter and treasury securities performed poorly. Blue chip stocks fared far worse than lower quality issues. This is evidence that greed is returning to the markets and money is returning from the sidelines. Some may be surprised to read that we view this as a good sign. We need investors to stop being scared. Investors are beginning to see opportunities and pursue them. We need more of this behavior. While the road ahead won’t be as smooth as many would like, it doesn’t contain as many potholes as there appeared to be a few months ago.
Our sense is that the strong move off of the March lows in the stock market may have been too much, too soon. In recent weeks, the prices of many lower quality stocks have retreated. Even so, most stocks remain comfortably above their March lows. This recession has lasted longer than most. It is important to remember that it will end. Things will get better. It’s just taking an awful long time to see signs of improvement.
Mark Hughes Larry
Judge Rob
Noyes Ric
Ordway
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