Thoughts on New Year's Eve
December 2008
On the last day of the most traumatic year any of us have seen in the financial and investment markets, I wanted to share some thoughts from other observers of the markets:
Warren Buffett – “Buy American. I am.”
At perhaps the darkest point of this past October, famed investor Warren Buffett wrote an Op-Ed piece in the New York Times that chronicled why he was beginning to wade into US stocks. In part, Mr. Buffet said:
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful."
As for those investors who sold all of their stocks and went to cash, Mr. Buffett said:
“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long term asset, one that pays virtually nothing and is certain to depreciate in value.”
The S&P 500 index is down by about 5% since Mr. Buffett wrote these words. However he noted that he had no idea what the market would do in the short term and that his investments were long-term in nature. As he noted in the article “if you wait for the robins, spring will be over.”
Jeremy Grantham – “How Low is Low.”
Another famous investor, Jeremy Grantham, agreed with Warren Buffett on equity valuations, noting “we also have moderately cheap US and global equities for the first time in 20 years.” However, Mr. Grantham also argues that there can be “overshoot” on the downside.
We are reconciled to buying too soon, but we recognize that our fair value estimate of 975 on the S&P 500 is, from historical precedent, likely to overrun on the downside by 20% to 40%, giving a range of 585 to 780 on the S&P as a probable low.
“The world faces unavoidable declines in economic activity and profit margins, so this overrun is unlikely to be much less painful than average, although you never know your luck.
Like us, Mr. Grantham does see opportunity in corporate bonds. “Chief among the many benefits of this crisis are unprecedented opportunities for investing in some fixed income areas where some spreads are so wide as to reflect severe market dysfunctionality.”
James Grant – “Is the Medicine Worse Than the Illness?”
James Grant, editor of Grant’s Interest Rate Observer, wonders if the Fed’s recent actions to expand the money supply will have dire inflationary consequence in the future in a Wall Street Journal essay on December 20, 2008. Mr. Grant opines:
Yes, today's policy makers allow, there are risks to “creating” a trillion or so of new currency every few months, but that is tomorrow's worry. On today's agenda is a deflationary abyss. Frostbite victims tend not to dwell on the summertime perils of heatstroke.
But the seasons of finance are unpredictable. Prescience is rare enough in the private sector. It is almost unheard of in Washington. The credit troubles took the Fed unawares. So, likely, will the outbreak of the next inflation. Already the stars are aligned for a doozy. Not only the Fed, but also the other leading central banks are frantically ramping up money production.
And Further…
Last, in an observation not related to investments, a bill was signed into law this week that waived required minimum distributions from IRAs and qualified retirement plans for 2009. Those clients who are over age 70-1/2 and clients who are required to take distributions from inherited IRAs will be impacted. We will be in contact with these clients to discuss the impact on their financial strategy.
On behalf of Jack Payne (who is currently in Pasadena to root for Penn State’s victory over USC in the Rose Bowl) and the entire team at JoycePayne Partners, I wish you all a happy, healthy, and prosperous New Year.
Michael Joyce, CFA, CFP