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All I could do was shake my head when I received the following “hand holding” email yesterday from an asset manager friend. Wouldn’t the clients be better off if their investment manager spent their time hedging the portfolio instead of writing letters?

Market Commentary and Outlook
Since the beginning of the year the global stock markets have been struggling to stay afloat however it appears that today we are seeing some capitulation on the downside. Or what we like to call a selling climax. The weakness in the U.S. housing market we’ve been witnessing for almost two years now has worked its way into the financial system causing huge losses and write-downs for the majority of financial institutions. This has now spilled over to the consumer and the retail markets as job layoffs, high gasoline prices, high credit card debt and a low savings rate have left the consumer with little disposable income. Consumers are tightening their wallets in the face of an uncertain environment. The credit excesses of the previous housing boom are being unwound and unfortunately it’s a painful process. This is necessary however before a bottom in housing can occur.

In the interim, the equity markets are trying to gauge the degree of the fall out and whether or not we are looking at a global recession. No one can accurately forecast the future but economic conditions have been deteriorating for several months and the markets are experiencing a decline to reflect this expectation.

On a positive note, the markets tend to discount weak economic conditions very quickly so by the time we are actually in an economic slowdown or recession, the markets are already beginning to recover. A recession is not the end of the world as the media would have us fear. There have been several recessions in the past which were always followed by a strong recovery.

Unfortunately, when the markets begin to snowball on the downside, valuations and fundamentals become irrelevant as the majority of investors tend to panic at the bottom and sell out just before the market turns around. This type of behavior was clearly evident in 1987, 1990, 1997, 1998 and 2002. The current market sentiment is just as negative and possibly even more so than those previous periods. This suggests to us that we are approaching a significant bottom in the market which we haven’t seen for some time. Several technical indicators we follow are also showing signs of a pending bottom. For some strange reason investor psychology tends to work the opposite it should in financial markets in relation to other ways in which we purchase goods and services or even private companies. Normally when we see a good deal we snap it up but when stocks go on sale people become nervous and afraid instead of embracing a great opportunity.

Nobody likes to see the value of their portfolios decline but we are optimistic that the markets will recover as they always do. When we are in the midst of a serious correction, much like we’ve seen over the past 15-20 years, we encourage you not to lose sleep over the volatility. As in the past, this period of time will slip into the history books once people regain their sanity. Everyone likes to talk about buying low and selling high, but in reality this is a lot tougher to do when you are in the heat of the battle. However, this is what is required if you are to be a successful investor.

In the next few days we are expecting to see central banks around the globe begin to make some aggressive interest rate cuts to help stimulate the economy and avoid a recession or engineer a soft landing. In the U.S., President Bush has also announced a huge stimulus package designed to help stabilize the markets and kick start a recovery.

We are in the middle of publishing our more in depth commentary which we will be released later this week but in the interim we want you know that we are monitoring your portfolios and looking for opportunities as they arise. Please feel free to call us if you have any questions or concerns.

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