October 9 Late Email to Clients: “Today’s Surprise Selloff”

Good evening,

After today’s surprise sell off, or crash, mostly because of margin calls and hedge fund liquidations I can say that we are treading in uncharted waters and are trying to navigate this storm as best we can which is turning out to be the Perfect Storm. I have been arriving in the office daily by 6:00 am and will be here over the weekend so please feel free to call me if you want or need to.

As it stands now, even the so-called Wall Street experts can’t agree on what course of action we should take. Between the lack of oversight and leadership from our elected officials in Washington, the self-fulfilling greed of Corporate America executives and lack of liquidity in any market around the globe, the stock markets are in a state of flux. Professionally, I have counseled my clients to stay calm and not panic, but the anxiety is building by the day so it is more important now to look at information and try to put emotions off to the side.

Due to worldwide banks being anxious to conserve their own cash in fear that their depositors would make massive withdrawals, they are reluctant to loan to individuals, businesses, and each other. This lack of trust in the banking industry severely limits the normal flow of funds which in turn causes investors to lose confidence in the financial markets and leads to unwillingness to invest; therefore, the sell-off in both the equity and bond markets. Although this entire sequencing of events started in this country (sub-prime loans), due to the nature of global economies, it has now spread to almost all parts of the world.

In this period of extreme panic and market sell-off, there was no “safe” place for investors.

Diversification of our portfolio, which in normal markets provides a hedge against any one asset class having a significant impact on the performance of the entire portfolio, has provided little benefit. Portfolios such as ours are constructed such that our asset allocations have low correlations and therefore provide expected returns that over time are relatively predictable. Right now, those correlations are converging around 1.0 which means that all asset classes are performing in a similar manner.

Going forward, this is not the time to change our course or do anything rash unless you truly can’t sleep at night and then you need to call me ASAP. The investment program is well structured and diversified. We believe that typical financial lending institutions (such as banks) will no longer be the primary supplier of capital for expansion in our economy. Long-term, patient investors will be able to step in and fill this void as the new providers of capital. This will present some very good investment opportunities on the back end of this painful sell-off.

These are difficult and tough times for all organizations and individuals. The recovery will likely be slow. The impact of recent moves by both our federal government and other countries as recently as yesterday (interest rate cuts) has not provided an incentive for the banking community to begin easing the credit crunch yet. Eventually, investor confidence will return, liquidity will begin to again be present as the banking industry sorts itself out and markets will begin to perform as they historically have. When and how quickly that happens, cannot be estimated.

In the meantime…….please email or call me with any questions or concerns that you may have.