April 2, 2009
As we head into April, the market has had a surge which began on March 9th. The March rally concluded as one of the 20 best months in stock market history. However it was preceded by a dreadful January and February. The question is this: Does this March rally really have legs, or will it become an April Foolâ€™s joke and turn south sometime soon?
There are phenomenal rallies that can occur during a bear market and this is one of them. We can go up further from here but at some point the rally will end and there will be profit taking and a retreat. The talking heads on cable TV can have us believe we are heading for a depression one week, and then a week or two later convince us all that our problems are gone and we had better jump on the train (the rising market) while we still have a chance.
â€śMARK TO MARKETâ€ť / TOXIC ASSETS
Accounting rule makers, the FASB (Financial Accounting Standards Board) will vote today (Thursday, April 2nd) on proposals to water down the â€śmark to marketâ€ť accounting rules. This requires companies, including banks, to peg their investments' value to its market value.
Suspending the â€śmark to marketâ€ť rules could be a boon for the market and banks, because companies would not have to value their toxic assets at depressed values (market value i.e. very low if there is no market to buy them) if they donâ€™t â€śintend to sellâ€ť them. If mark to market is suspended, an institution would not have to recognize any losses if they intend to hold these assets (toxic) until maturity. These changes would immediately cause banks to increase the value of their toxic assets on their balance sheets to much higher numbers â€“ good for the banks, but maybe not so good for investors. But there has been heavy pressure from Congress on the FASB to relax the rules and this is likely to happen.
PPIP INSPIRES INVESTORS
Last week, Wall Street got a detailed plan to heal banks. The federal governmentâ€™s Public-Private Investment Program aims to attract private sector investors to buy $500 billion or more in troubled assets. Pension funds, insurance firms and other long-term investors can compete for federal loans in auctions, and then combine this borrowed money with their own funds to buy up illiquid securities currently burdening thrifts.
MORTGAGE RATES DROP BELOW 5%
If you have at least 20% equity in your home, and a FICO score of at least 740, there is a excellent chance you could refinance your mortgage to a rate as low as 4.5 to 4.75% with zero points. If you would like to discuss this, give us a call.
Tomorrow the Labor Department will issue its employment report for March at 8:30 a.m. EDT. Economists are currently forecasting that the U.S. economy lost 657,000 jobs and the unemployment rate climbed to 8.5% from 8.1%
**RIDDLE: Pronounced as one letter, written with three, there are only two letters in me. Iâ€™m read from both ends, and the same either way. What word am I? Answer below. **
WHEN DO WE THINK THINGS WILL TURN AROUND?
From our experience, we believe we are much closer to the bottom then we are to the top. But if we really knew exactly where we are, we wouldnâ€™t keep it a secret. We believe that those who are invested and investing in equities today will be rewarded down the road. We donâ€™t know how long that will take.
There is reason for some optimism: better fiscal policy, small signs of economic revival and loosening credit. These are all slightly better signs that the banks have turned it around. The downside is increasing unemployment which is always a lagging indicator.
If you are still nervous, then repositioning to a more conservative portfolio is appropriate. If you are becoming more optimistic about the long term, then stay the course or slowly increase your equity weighting. We are here to discuss this with you. Call us any time to review your portfolio or if you would like to meet.
We are going to close today with a quote from Samuel S. Stewart, the chief investment officer of Wasatch Funds. In early March 2009 he wrote:
â€śUnfortunately, our immediate gratification culture seeks immediate solutions with immediate improvements, and when they donâ€™t come, panic and fear win the day. It is times like these when perhaps we see the downside of our round-the-clock news cycle and constant communications. Our societal response to this crisis needs to be patience and creativity, not entitlement and fear.â€ť
Hopefully, this rally is not an April Foolâ€™s joke. Enjoy the nicer weather and the green trees and flowers of Spring.
Edward J. Kohlhepp, CFPÂ®, ChFC
Edward J. Kohlhepp, Jr., CFPÂ®, MBA
**ANSWER TO RIDDLE The word â€śeyeâ€ť.**
P.S. During these turbulent times, many people are paralyzed with fear. If any of your friends or family would like a second opinion regarding their portfolio, we would be happy to have a complimentary consultation with them.