Welcome
to the November 12,
2008 issue
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It has been a terrible week for stock markets around
the world. Analysts continue to look to the fundamentals for the vicious selling
we have seen such as todays. We think they are looking in all the wrong places.
If the fundamentals were in play, there might well be buying as stimulus after
stimulus is proposed around the world.
But no, we believe that the selling we are seeing is a continuation of the
selling that has gone on for the last two months, namely forced selling by
hedge funds and similar selling coming from fund redemptions. This selling
has nothing to do with the fundamentals. To put it another way, the selling
is valuation-blind. It obviously has gone on longer than we (or most anyone
else) expected. It has also driven the S&P 500 back down to the area of
its previous low.
If the market can hold here – a big “if” – it would
give the market an important “technical” lift. But the future of
the market will not depend on the technicals, but on the assured success of
the stimulus packages that are being put in place. China announced a huge stimulus
package over the weekend. The U.S. will shortly announce all or part of one.
In the end they will matter. Once this market turns and yes, it will turn,
we would expect some sharp snapback rallies. This period is very hard to endure,
but it has set the market up for a strong recovery.
There is no change in our recommended allocations.
New Fund Ratings – For domestic stock funds, two funds are now
rated Buy: Vanguard Dividend Appreciation Index and Powershares Dynamic Large
Cap Value. For international stock funds, two funds are now rated Hold: Oakmark
International and Fidelity Worldwide. There are no other changes.
The Stock Market – There are continued reports of large hedge
fund liquidations. The liquidations explain the weakness in former market favorites
such as Google. These former stars are highly liquid, and easy to sell. We
would expect that they will also be the leaders when the market rallies.
The Bond Market – The most encouraging sign that the markets
are responding to the Fed’s efforts has come from some thawing of the
frozen credit markets. If the credit markets can be made to function again,
a good part of the current difficulties would be relieved. Progress is being
made.
The Select Portfolio – There is no change for this portfolio.
The next Hotline is scheduled for Wednesday, November 19th at 7pm.
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