Client Update – October 24, 2008

Today we are seeing all the markets around the world sell off in historic proportions. Before the US markets even began trading this morning, orders to sell so overwhelmed the New York Stock Exchange that they halted additional sell orders from coming in until the markets opened at 6:30 am. This market activity is being caused by two very different but related events. The primary cause is the worldwide slowdown in economic activity. Secondarily, and more importantly for the next few trading days, forced selling of billions of dollars of assets by hedge funds will whipsaw the markets.

What does this mean? In the near term, the volatility in the markets will continue. We will see more days like this in the future, both on the upside and downside. Critically, the entire stimulus that world governments have put in place has not yet had a chance to work. Starting next week the Fed should begin to deploy the assets authorized through the historic bailout vote. As these assets are actually deployed, and similar stimulus plans are implemented, they will begin to more greatly influence the markets and more importantly the economies of the world.

In addition, we believe there will be an interest rate cut both here and in Europe next week. The world is no longer worried about inflation with oil dropping below $65 a barrel and home prices falling over 30% in many areas. No, the world is worried about deflation — falling prices, earnings and economic activity. Governments around the world will throw all the money (ours and theirs) at this problem to try to head off a more serious recession than the one that is here now. These steps are in stark contrast to the actions leading to the Great Depression of the 1930’s. At that time, governments raised interest rates and cut off access to credit — just the opposite of what policy makers are doing today. This printing and spending of money will eventually lead to much higher rates of inflation, but should help prevent a reoccurrence of that time in our history.

We have no doubt that we are in a severe economic slowdown. However, the markets will and are already overshooting to the downside just like they overshot on the upside in 1999-2000. There are many great values and opportunities being established both inside and outside the stock market. As an example, after the market crash of 2002 the bond market had returns of over 10% the next year and high yield bonds returned over 30%, which was more than the S&P 500.

Although we cannot dismiss the significant damage that has been done to markets, economies, and most importantly households, it is most important now not to panic, but instead seek information and make rational, reasonable decisions. We are carefully monitoring the economic and financial situation and will continue to strive to act in your best interest at every turn. Please contact us if you have any questions.

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