A Crazy Start to '08

What an ugly start to the year. January was bad, just continuing the bloodshed from the end of 2007. February and March weren't much better. However, we experienced two important psychological bottoms in January and in March, which will help the market re-establish and gain its footing.

The first important bottom occurred the Tuesday after MLK, Jr. day, after a weekend in which all other major markets globally had sold off on Monday (when the U.S. market was closed). So here's this psychological agony going on over the weekend, the overnight futures markets showed the market down 600 in overnight trading, and you know what I was doing?: Licking my chops, and I couldn't wait to get into the office to start buying strong companies at give-away prices; after all, this is my job, right? I get paid to be the calm guy and to buy companies when there's blood in the streets.

The thing I hadn't counted on was the Fed, which decided that nobody is allowed to experience any pain anymore. The Fed aggressively lowered rates, lowered the discount rate, and started printing money, injecting liquidity into the banking system at a clip I've never seen before. The market opened down about 550, and within 30 minutes of the Fed's action, about 350 of that juicy fat-pitch down the middle of the plate disappeared back to the upside. I managed to do some buying that day, but not to the extent that I wished to benefit my Clients. Can't an investment manager be allowed (for just 1 day, please Uncle Ben!) to do his job? Frustrating.

The next psychological bottom came on March 7 (Friday), and March 10 (Monday). This of course was the weekend that Bear Stearns went from a market cap of $2.8 Billion on Friday to being sold for $286 Million on Sunday evening to JP Morgan. The firesale was brought about to effectively "bail out" Bear Stearns, with the Fed's help in guaranteeing certain aspects of the deal. It is thought that a failure of Bear Stearns could have unraveled the financial system. Oh, is that all?! Anyway, it was a sweetheart deal for JP Morgan, which saved the financial system that weekend; interestingly, it was J.P. Morgan himself who bailed out the stock exchange about 100 years ago...

With the Fed in a very generous mood to print money, assuage investors, and stem the panic, the market is getting its legs back. There is still a great deal of uncertainty in the market, and pessimism, but this pessimism is temporal; this is the time to be buying quality companies at low valuations. Investors with appropriately long time frames should enjoy nice returns using this strategy, while the speculators are running scared. The longer term negatives that are concerning: inflation is rising, growth is low or stalled, the dollar is weak, and the Fed can only do so much. In fact, we're at the point now where the Fed has little flexibility to do anything should another shoe drop (financial crisis, terrorism, etc.). Congress needs to do its part and *structurally* add incentives for investors to invest by lowering taxes, and control spending, most importantly on our entitlement programs!