Market Commentary

Front Page News

September 2008

We know many of you have been reading and seeing headlines about the global financial markets, and may feel unsettled by the turn of events and particularly with words like 'meltdown' and 'panic' being used in the press. We know that when the capital market news moves from the front page of the business section to the front page of the paper, it can be cause for concern, so we thought we would briefly address the issues as we see them.

What has happened

• We have been writing for some time that the unwinding of a particularly ebullient credit cycle would cause pain in some quarters and contribute to a slowing economy. This is indeed happening and there are winners and losers. Firms that took on too much risk which even they didn't fully understand at the time are now in the unfortunate position of having to recognize losses. This is what led to the buyout of Bear Stearns, the bankruptcy filing of Lehman Brothers, the nationalization of Fannie Mae and Freddie Mac, and the current questions around Washington Mutual, AIG, and other financial institutions.
• The institutions chartered to guard against disorder in the capital markets and in the economy are very active in finding an orderly way through. This has been somewhat successful as the Federal Reserve and the current administration have been active in helping maintain order and liquidity in the markets. While no solution in this tough situation is perfect, the Federal Reserve was put into place initially to intervene in order to aim at preventing panics that rocked the U.S. economy in the late 19th and early 20th century, and we believe it is playing a vital and positive role in the current situation.
• Stock investors hate uncertainty and falling earnings, and stock markets have reacted predictably negatively to the uncertainty in the financial and banking sector.

What is important about all of this for your investments

• Client portfolios have been underweight financial stocks for more than two years, as we have de-emphasized this sector in our investing for you given the risks we saw developing on the horizon. We continue to emphasize stock and real estate managers who work to minimize downside in bad markets as well as the long-term opportunities available to patient investors. This has clearly been the case during the past weeks, as many of your core holdings are down less than the broader international and U.S. stock markets.
• We continue to think your portfolio has an appropriate balance of stocks, bonds, and real estate to produce positive absolute long-term returns that meet your target return. We have not been busy traders this year – we feel we got clients ready for what happened and are now riding with you through the storm.
• While it can be hard to watch the headlines and witness declines in investment values, taking reasonable amounts of risk to generate returns that will outstrip the pace of inflation, taxes, and fees in the long-term remains our ultimate goal for you and we believe we can achieve that goal.

We remain very interested in scouting for increased opportunity now that the markets have corrected so significantly; however we think at this point buying more stocks would be premature. We will certainly keep you posted as opportunity or further risk develops.

This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.