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Third Quarter Commentary


Hurricane Isidore May Have Left Us, But The Storm On Wall Street Remains


There is no sense in rehashing the difficulties encountered by the financial markets in the third quarter. It has been challenging and emotional to say the least. The current environment has overshadowed a recovering economy, a rebound in corporate profits and a return to more reasonable stock market valuations. Unfortunately, investor psychology continues to be battered by geopolitical tensions and a crisis in confidence in the integrity of corporate America and Wall Street. Given this environment, many have been led to believe that Wall Street is a dangerous place.


Call me sick, disturbed or mentally challenged, but I am getting positively excited over the market and its offerings. When I make comments of this nature it is apparent that my logic may not be obvious. As such, it might be informative to illustrate one example comparing the returns of a boring common stock (Philip Morris) to that of the ten year U.S. Treasury. See the attached case study.


Needless to say, as the market becomes more and more manic and depressed the more people are likely to believe that the world truly is coming to an end. This mentality creates a rush out the stock markets door with the end result being many great companies left behind at bargain prices. While Alan Greespan talked of “irrational exuberance” six years ago, today, Wall Streets mood is nothing but “irrational depression.” In this environment most investors, and that certainly includes the idiots on Wall Street, follow the herd and allow their emotions to overcome common sense. The intelligent investor, however, knows that irrational behavior creates very rational opportunities.


In assessing the emotion of investors and consumers it is interesting to look at the highly touted Consumer Sentiment Index, which has dropped recently. It is no surprise that we would all like the economy and financial markets to settle down. Every evening we turn on the news and a bunch of journalists tell us the sky is falling. It is enough to get most people feeling negative. However, don’t read too much into this rating of sentiment. Despite growing pessimism, consumer spending is not slowing down. On the one hand you have people talking about how depressed they are, while at the same time they continue their spending. Why do we care—because consumer spending makes up about two thirds of our nearly $10 trillion U.S. economy. However, spending and sentiment are not closely tied together. More importantly, we have not had a single year of falling consumer spending since 1938.


Another factor to consider is that of unemployment, which stands at a quite reasonable 5.7%. To put this figure in perspective the unemployment rate was 7.8% following the 1990-1991 recession and 10.8% after the 1981 recession. When people have jobs they will continue to spend. August Personal Income and Spending figures are both expected to grow by .5%.


Why is unemployment at a reasonable level given the behavior of the financial markets? To begin with, corporate America is profitable—despite what the evening news leads us to believe. Overall third quarter profits are expected to rise 7.3%. Also, interest rates are at a 40 year low. Cheap borrowing costs allow companies to expand and finance operations in a more efficient manner. Don’t look for the Federal Reserve to increase rates too soon.


Further support for keeping people employed and corporations healthy are signs about businesses’ willingness to spend money on equipment and software. Investment in equipment and software grew 3.3%--the first gain since the third quarter of 2000. Companies are also starting to replenish their stocks of goods. Inventories increased by $4.9 billion in the April to June period, the first gain in inventory investment since the final three months of 2000.


In evaluating all of this information it is imperative that we stay cognizant of the fact that logical investing (I did not say speculating) is quite often counter intuitive to the prevailing wisdom on Wall Street and certainly to the emotion of the masses. This is where opportunity presents itself and the phrase “it is darkest just before dawn” is most applicable.


Call with questions.


Sincerely yours, 


Dave Sather, President

Certified Financial Plannerä



Last Updated on Friday, 06 March 2009 14:45