|
Home > Personal Finance Articles > Market Commentary
Market Commentary August 9, 2007
Tough month in the market? Yeah, you could say that. Tough one-year performance in the
market? Well, not so bad. Tough last five years of the market? Wow, not bad at all. Tough
last twenty-five years in the market? OK, you get it.
The waters have been rocky; there is no doubt about that. We have seen some volatile market
conditions in the past few weeks and months and sometimes we all need a reminder of what’s
important in a time like this. As a long-term investor, we must think long-term and not
continue fooling ourselves that we are long-term, but still watch CNBC four hours a day and
check our account online three times. Markets do fluctuate. There most definitely is a concern
that must be accepted with the “sub-prime” mortgage situation. Credit issues will work
themselves out. The good news this time around is that market valuations are actually
attractive! Currently, the S&P 500 is trading at 15 times forward earnings at a conservative rate.
Historically, when inflation is down below 3% (as it is today) market P/Es are above 18. In
summary, the stock market has really been a victim of this credit and liquidity issue.
We keep hearing the buzzwords of credit and liquidity through this recent bout of volatility.
Let’s address what is actually happening here. It all began with people getting mortgages who
maybe should not have gotten mortgages. Then, beginning last year, these people could not
pay the mortgages and began defaulting, causing the housing market to struggle. Then, Bear
Stearns ran into their problem with their two hedge funds that had substantial losses on the
sub-prime positions in their portfolio. This caused the market to realize how difficult it may be
to trade these types of securities because of difficulty in valuing the securities and also finding
buyers for them. Because of the structure of these investments, the major holders of these
types of investments are hedge funds and other large debt players. These natural players in this
part of the debt market are in a need to sell assets to gain liquidity in their portfolios because of
the depreciation in the value of their portfolios. However, because they cannot sell these assets
because nobody wants to buy them, they must sell higher quality, more liquid investments such
as stocks, causing the markets to trade down.
Again, we see many opportunities in high quality assets and investments because they have been hurt as a result of this market volatility.
Income portfolios have also felt the effect of this market. We are seeing some very attractive
opportunities in the income investments. We believe that the closed end fund market has been
punished much harder than really necessary. For more clarity on the effect on income
portfolios, we reference you to our previous market commentary titled “Income Worries” on
the website. However, we want to remind you of a few things regarding these portfolios.
• These investments are not short-term investment vehicles.
o You must be patient and understand that these investments do fluctuate in
value. However, we have seen that over time, being diversified in the
investments will yield you positive results.
• Income outlook is positive
o The goal of the income allocation of your portfolios is to produce income on a
regular basis. The current market environment indicates that the income
coming from these portfolios should be safe and could potentially benefit from
possible lower short term interest rates.
• Almost no exposure to this mortgage market
o We have been thumbing through annual reports of the closed end funds that
our clients own. There is very minimal (less than 1%) exposure in very few
numbers of the funds to the mortgage market in general. This according to the
funds’ annual reports.
• Corporate bond rates rising is good news long term
o A large reason for the depreciation of the closed end funds is the increase in
interest rates on corporate bonds. In the short term, this hurts investments that
hold lower yielding bonds. However, in the long run, as these lower yielding
bonds come due and mature, it will allow the funds to purchase higher yielding
bonds, thus pushing up the yield on portfolios.
You must ask yourself this question as well: “Am I accomplishing the goals that my advisor and
I had set out to accomplish with the different allocations in my portfolio, despite the shortterm,
violent market moves?” For example, is the income portion of my portfolio producing
the income that is necessary for me to live on in retirement? If the answer is yes, then you must
ignore the short-term noise for the time being.
Mitchell Reiner
Certified Financial Planner
|
