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Randall Financial Group News

31-Dec-08

2008 Q4 Market Summary

Any attempt to describe 2008, particularly the events in the latter part of the third and into the fourth quarters could not do it justice. The level of fear and panic that swept global financial markets was unprecedented in our experience or that of any other financial professional working today. What began as a concern over the housing and mortgage markets quickly evolved into a global financial crisis as venerable institutions collapsed, were bailed out, or forced into mergers of survival. Weakness that many thought would be contained to the U.S. quickly spread around the world. Emerging markets that were seen as engines of unstoppable growth have been caught in an economic tsunami right along with developed market nations. There was almost no place to hide as virtually every market and investment class saw massive declines (see chart at right). The lone exception has been U.S. Treasuries as a flight to safety saw yields plummet and the 10-year note rise 19.9% for the year.

Fourth Quarter declines were essentially a continuation of what was set in motion at the end of September. The collapse of Lehman Brothers on September 15th had wide-ranging and unforeseen consequences throughout the financial system. Counterparties to Lehman transactions were left holding the bag as the government declined to bail Lehman out resulting in their hasty filing of the largest bankruptcy in U.S. history. As a consequence, billions of dollars in value were erased for everyone from shareholders to lenders. More troubling was the complete seize-up of credit markets as those with any capital at all refused to lend it. Corporations, even healthy ones, run on credit and once it was gone, it had a dramatic effect on industries across the globe.

Among the hardest hit industries has been U.S. auto manufacturers. Already hurt by declining sales, they are also suffering severe cash flow shortages with their inability to get financing for themselves or their customers. They have turned to the Federal Government for a hotly contested bailout and have been provided with some initial funds. But the failure of one or more of the big three remains a definite possibility. Financial institutions have also continued to suffer. The most dramatic of many stories in the fourth quarter was that of AIG. The giant insurer was teetering on the brink thanks to their exposure to a little known but widely issued investment known as the credit default swap. After having learned a lesson with the failure of Lehman, the government eventually came to an agreement to rescue AIG in a package now valued at $150 billion dollars. The fourth quarter also added another villain to Wall Streets hall of shame. Bernard Madoff, a well respected member of the investment community and contributor to the founding of the NASDAQ market stands accused of stealing $300 billion dollars in assets entrusted to him by some of the worlds wealthiest families. Madoff himself called it historys largest Ponzi scheme. Among his many victims are rumored to be Kevin Bacon and Steven Spielberg.

The struggles of the broader economy are now the major concern. Government economists, in an incredible act of hindsight, decided in the fourth quarter that we have been in a recession for some time. Theyve placed the starting date as December of 2007 which already makes it the longest since 1990-1991. Unemployment has spiked and consumer spending that accounts for 70% of U.S. economic activity has fallen off a cliff. Most observers dont expect a recovery to start until the end of the second quarter of 09 at the earliest, making this the longest recession since the 70s.

Market historians will debate what went wrong for years to come, but as always there is cause for optimism. The Federal Government is taking unprecedented actions to see that the economy slips no further. President Elect Obama and his incoming administration are at work on a stimulus package that many suggest could range from $800 to $1 trillion dollars. They are also seeking the release of the second $350 billion of TARP funds with some earmarked to help distressed homeowners directly. Its pretty clear that well see more difficult times ahead. The first two quarters of 2009 are likely to see further job losses and deteriorating corporate earnings. However, the market volatility seen in September through November eased significantly in December. It would seem that while most investors remain very cautious, much of the panic has subsided. It is impossible to say whether we have seen the worst or if another shoe will drop. But the stock market typically recovers ahead of the economy as a whole. We are looking forward to that and will continue to keep you apprised as events unfold. Information presented here is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

© 2009, Randall Financial Group, LLC All rights reserved. Please Visit www.Rfinancialgroup.com

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