Credit Crisis Resolution
I limited my commentary over the summer and as fall approached developments were moving at a rapid pace. There was not much of a point in posting since the defensive work in our portfolios had already been done. We spent most of the 3rd quarter with 50-65% cash/bonds. The only equities we held were tied to metals and as the economic situation deteriorated further, we move out of those positions as well. In early September our portfolios held 70-85% cash/bonds with the remaining positions in long commodities, managed futures and hedged equities. I should return to a more normal post schedule of 3-4 a month. Some of which I will start to send out as emails. If you would like to get on the list, send an email to info@dightmancapital.com and put Global Market Monitor in the subject line.
A number of factors contributing to the credit crisis converged as we moved into September, forcing the U.S. government to structure a plan to stabilize markets. We have yet to see a proposal approved by congress, but in all likelihood we will see one shortly, perhaps as early as tomorrow with passage before the end of the week (it actuall passed on October 3rd) .
In a future post I plan to chronicle the series of actions taken by our elected officials over at least the last two administrations that led to the current situation. In my judgment, there are numerous policies and Politian’s responsible for this mess. But at the end of the day it is about individuals and poor choices, at the top of government and along main street.
I do not expect the downward bias in the stock market to change in the near term. The underpinning of the current problem is tied to our residential real estate market which so far shows little improvement. Prices are still declining and sales are sluggish. Until our real estate market stabilizes, it is going to be difficult for our economy to improve. It is possible a U.S. government rescue plan could shore up the housing market. At a minimum a rescue plan should restore confidence, reduce market volatility and prevent credit markets from locking up. If the latter scenario were allowed to happen it could send us into a deep recessionary environment.
Managing investments involves a certain amount of contradiction and one of the issues faced by investors today involves inflation. While consumers and business are feeling inflation pressure, in the form of higher prices for goods and services, prices for assets that are usually sensitive to inflation (like bonds) are not reflecting an expectation of future inflation. At the same time, we are seeing a deflationary environment in real estate and stocks. For this reason too, an overweight to cash and short term debt seems prudent right now.
Certainly, some terrific investment opportunities will come from the decline in global equities. For example, dividend yields are becoming much more attractive. For the time being, however, patience is the rule of the day. Even if a proposal passes congress and the market rallies hundreds of points, the general market trend is downward and it is going to take a little time for that to change.