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Best of the Web: Voices of Reason

October 2008

Picking Stocks

Trying to make sense of what’s happening in global markets and what it means for your portfolio is nearly impossible if your primary information source is TV or radio “news.” Even reputable reporters struggle as they try to fit cogent explanations of collateralized mortgage obligations, credit default swaps and reverse auctions into a 30-second sound bite. And inevitably, in an election year, pundits on both the left and the right rush to compress a 20-year history of deregulation and financial industry change into a few “gotchas” that shed no light on workable solutions. Fortunately, there are voices of reason and even modest reassurance to be heard. Here are two highly reputable and very readable sources for those wishing to go behind the headlines.

Steven Perlestein, Washington Post business columnist, has written a balanced and wonderfully jargon-free series on the current financial industry crisis.

On the various rescue proposals, he notes that the problem isn’t the stock market or even the real estate market: “The problem is in the credit markets, which are quickly freezing….Banks and big corporations and even money-market funds are hoarding cash, refusing to lend it out for a day or a week or a month. Even the best companies are having trouble floating bonds at reasonable rates. And the shadow banking system—the market in asset-backed securities that ultimately supplies the capital for most home loans, car loans, college loans—is almost completely shut down.

The Treasury-led rescue proposal “isn’t primarily a bailout for Wall Street—it’s an attempt to jump-start certain credit markets that have broken to the point that nobody is buying, driving down prices to the point where they are well below any reasonable estimate of their long-term economic value.”

Perlestein’s analysis of past government-led financial rescue missions, such as the Lockheed and Chrysler loan guarantees, or the New Deal Home Owners Loan Corporation mortgage bailout, is particularly lucid. As he points out, “History shows that rather than costing taxpayers, [past] rescues have often wound up making money [for the government].”

Perlestein argues that the recent bailout packages for mortgage giants Fannie Mae and Freddie Mac look “to be structured on terms quite favorable to the government….[T]he Treasury will almost surely have to invest tens of billions of dollars to keep Fannie and Freddie adequately capitalized, and how much of that money will ultimately be recovered depends on how things turn out with the millions of mortgages the companies hold or have guaranteed. But if it is willing to wait until housing markets finally recover, there's a good chance the government will recoup most of its investment, along with a 10 percent annual dividend and a hefty guarantee fee.”

You can access Perlestein’s recent commentary, along with the 2007 columns (several on the looming credit crunch) that earned him the Pulitzer Prize here.

The Crisis and Your Portfolio

Detailed looks at the past credit panics in Japan and several emerging markets suggests that even with Federal intervention, the current U.S. crisis could take several years to fully resolve. But a review of past market and economic downturns by Liz Ann Sonders, chief investment strategist at Charles Schwab, suggests that recovery in the stock markets is likely to precede a full recovery for the global economy.

In her most recent post, she notes that “…[H]istory has shown some of the deepest bear market bottoms and/or buying opportunities have come during the depths of recessions. The S&P 500 is currently down 36% peak-to-current, so we’re clearly beyond the historical norm. Since it’s anybody’s guess as to when the market will bottom, this may be the market’s way of telling us this recession is likely to be a tougher one than usual.

“But let’s not forget that historically, a significant percentage of bear market finales have occurred during economic recessions. In fact, six of the nine last bear markets ended during recessions. And the subsequent rallies/new bull markets can be fierce and quite rewarding…that's assuming you haven’t fully bailed out of stocks during the pain on the downside.”

While there is no evidence that the current financial crisis is over, The Economist notes that some bright signs are beginning to emerge, among them, a dramatic fall-off in inflation rates and a host of investment opportunities for those institutions able to pick up the scattered pearls of businesses shed by companies in trouble.

Is it time to buy stocks yet (or anything else for that matter)? Opines the Economist: “It is quite plausible that those who buy shares today will look smart in five years’ time. It is much less certain they will look smart six months from now.”


The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Past results are not indicative of future performance. Outside sources used in this article are believed but not guaranteed to be accurate. Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve.