Where Are We Headed?

s investment advisors, we want to be certain to communicate our thinking during this volatile period. Given the widespread confusion created by the actions of the markets, our government and financial press, we want to help our clients sort through the conflicting and confusing current environment. However, it is important that we state from the outset that irrespective of the turbulence, we believe our nation’s financial system to be strong.

Where are we and where are we headed? The markets have been reacting to a financial “bubble” since last summer when the sub prime mortgage issue started to unfold. The initial reaction from media pundits was that the credit issue was going to be restricted to the sub prime arena alone. This proved to be wishful thinking. As the sub prime mortgage fall-out spread, its impact increased as the markets began to absorb systemic shocks from continued revelations of greater magnitude. The packaging of leveraged sub prime loans with poorly defined risk created significant volatility in the financial sector. The strength of certain financial institutions was called into question. This culminated in the apparent sale of 85-year-old investment bank Bear Stearns to JP Morgan on Monday, 3/17. It should be remembered that the first hedge fund with leveraged sub prime loans was a Bear Stearns fund.

The role of the US central bank, our Federal Reserve Bank, has come sharply into focus. While initially slow to respond, the “Fed” has acted with an authority, spontaneity and ingenuity not often seen from that body in its 80-year history. From rate cuts in the Discount Rate, the Federal Funds Rate, the infusion of capital into the credit markets in coordination with other global central banks to the engineering and financial backing the JP Morgan-Bear Stearns transaction – the “Fed” is hitting full stride. We expect their continued actions to prevail.

While credit issues will not disappear overnight, we note that historically the market always looks ahead 6-9 months. These issues will work themselves out and we believe any possible recession is largely priced into the current market. Within this context, we believe there are several attractive industry sectors and within them many companies attractively priced in this market.

In closing we believe time is on the side of long term investors in what we believe is the strongest and most liquid market in the world. It is during these periods of difficulty that the US financial system displays its ability to adjust and correct its deficiencies thus underscoring its great value to our country and the world.