Volatility Reigns Supreme

We will get through this volatile market. Today the market had its biggest 1-day rally in 75 years. However, the markets have been in a free-fall over the last 4 weeks, with seemingly no end in sight. With all the fear and uncertainty, we have blood in the streets, and we are approaching the point of what Sir John Templeton would call “maximum pessimism”, which traditionally has been a good time to invest (even when we are not sure where the bottom is). Some high quality institutions are trading at less than the cash value on their books. We are all long term investors, even those investors who have just started, or are about to enter, retirement (since the average retirement lasts 20 years). On Friday markets were at a price level last seen in the 2002/2003 time frame. Since we have been in a very technically driven negative environment, in technical terms we have a lot of “price support” between Dow 7500-8500. This was hardly comforting on Friday, and despite today’s rally, we may touch these levels again as the market attempts to create a “bottom”, and we have all become even longer term investors due to this violent price volatility.

In looking through Client accounts, you own strong companies with strong products and services that were purchased attractively, and many of these companies are quite defensive in nature. Most accounts contain huge doses of high quality health care companies, oil drilling, food, tobacco, alcohol, consumer products/staples, since I typically try to diversify “away from” undue risks in trouble areas. Over the years I have been sometimes questioned for being too conservative in the choice of business enterprises in which to invest, though ACC Clients have at least the comfort that the companies invested in have a bright future, despite the short-term swing in prices. Despite this, the spillover effect from the financial companies is what we are currently swimming in. This weekend’s G7 meeting has resulted in a coordinated global effort to prevent large institutions from failing, and to inject capital directly into banks; this is very positive in the sense that it will help to prevent a situation of fewer and fewer counterparties to absorb “counterparty risk”.

One of the Warren Buffett maxims I try to adhere to is: own quality companies where we can sleep at night even if the stock exchange was closed for 5 years. Had I the foresight of hindsight (i.e. crystal ball), we would of course all be sitting in cash in the beginning of September and starting to buy in here with a 5 year outlook. I still continue to make slight changes in portfolios to take advantage of current prices where possible with a long term perspective, and with new cash am slowly building positions. Companies with solid balance sheets and big dividend payments look attractive, since there are many solid companies with dividends of 4-6% right now, which exceeds the yields on Treasury securities by a lot (granted not as “safe” as a Treasury, but still extremely attractive). With all the “flight to quality”, many investors have flocked to money market and Treasury securities; this trade will eventually reverse as equity yields compete with bond yields. Municipal bonds nationwide have had a tough September and October, but are good relative values at this time, especially relative to Treasury securities on a price and yield basis.

All investors, including myself, have been disappointed with the current economic and market situation, and please know that I am here piloting the ship through these troubled waters. I know you have placed your trust in me, and I will continue to do the best job possible in this environment.

-ACC