Bartlett Commentaries
Market Commentary, 03 / 2008
We customarily offer written commentary when quarterly appraisal reports are due. Since that would be in April, and since the stock market has been so chaotic lately, we thought an interim report to clients was in order.
The major problems in the markets began last summer, and much of the activity has been focused in financial companies which would include: banks, brokerages, real estate companies, etc. The fundamental source of the problems has been the excessive use of leverage: too much debt, too little equity.
You may have read of what triggered the 1929 stock market crash: many people were buying speculative stocks with borrowed money – often just 10% down. When the market fell, overextended investors had to meet margin calls, and the additional selling pushed prices even lower. In recent times something similar happened in real estate – houses and condominiums were being purchased with 5% down (or less!). The most aggressive buyers were simply speculating: buying properties solely in hopes of selling for a quick profit. However, something happened on the way to their easy capital gains: home prices stopped rising, and t hen they actually began falling. Like the leveraged stock speculator of the late 1920s, real estate speculators were depending on ever-rising prices and when that stopped there was a mad scramble to get out.
Nowadays mortgages and commercial loans are not always held by your neighborhood banker. Instead, they are in many cases "packaged" and sold like bonds, and often it isn’t always clear who owns the assets, or where the paper trail leads, or what the paper is really worth. This uncertainty can fuel indiscriminate selling when liquidity is of the essence. Bear Stearns is the latest and most spectacular casualty of the unwinding of real estate debt which was used as collateral to partially finance the firm’s business. The collapse of Bear Stearns was perhaps one of the greatest margin calls of all time, and epitomizes the risk of being highly leveraged when underlying collateral is of questionable value.
The mortgage debt debacle and resulting credit crisis is what the Federal Reserve and the assembled wise heads on Wall Street are currently trying to straighten out. The “Fed” is making progress and necessary painful steps are being taken, and in due course the worst of the problems – and the uncertainty that has everyone so concerned – should be behind us.
Meanwhile the economy is losing steam, weighed down by more cautious consumer activity resulting from job losses and deteriorating home equity. Thus we have what is probably a recession that may last into late summer, and stocks may not perk up until recovery is more visible.
Patience is a required virtue for successful investing, and we must all bear in mind that this too shall eventually pass. The headlines are grim, and in some cases decidedly depressing, but this is par for the course in times like these. In fact, emotions usually reach their nadir at about the time the market is about to turn.
For more information on this topic, please contact us. At Bartlett & Co, we assist high net worth individuals and their families in defining & reaching their life goals.