Friday, December 14, 2007

We had a difficult week this week

The Dow was off 300 points for the week and if that isn't bad enough we closed on the low for the week and the day on Friday. I was explaining to a client recently how volatile the markets have been over the last 4 months. During that time we have seen two ten percent corrections and we may have started a third with the performance this week.

Over Time,
One Week or Four Months Disappears on the Charts

Let’s look at two days this week and see just how volatile the markets are. On Tuesday, more commonly called “Fed Day” the Open Market Committee cut the Fed Funds interest rate by 25 basis points (one quarter of one percent). The markets did not like the small cut in the Fed Funds interest rate and no cut in the discount rate. The result was that the stock market closed down just under 300 points for the day. Wednesday morning the market surged off the wimpy Fed move the day before, at one point, the Dow Jones was up about 250 points. Then it gave all that back and was down about 80 points. The market closed on Wednesday up about 45.

You Do the Math

So, in the matter of two days, the market went down 300, up 250, down 325, and then up 40 points. We took a slight breather on Thursday and then went down 178 points on Friday closing at the low for the day and the week. These market swings can drive you nuts! If you let them get to you. If you pull back to a year and look at the chart of the market, it will be hard to see what happened this week, and the further out you go in time the less you notice the volatility of this week.

My point is that if you have a longer term view the weekly or monthly movements have little impact on returns. I know it is hard to watch all this turmoil in the markets, that is the reason by and large I don't pay that much attention to short-term changes in the market. What I ask myself is: do I want to continue to own what I own? I do expect that the markets will continue to be ranged bound till the end of the year. I also expect the volatility we have been experiencing to continue.

Credit Markets Say the Trouble Isn’t Over

Recently I wrote about Special Investment Vehicles (SIV) that is off the balance sheets assets of the banks and brokers. Two weeks ago E-Trade sold $8 billion of SIV’s for 29 cents on the dollar. On Friday Citibank announced that they were moving about $43 billion in SIV’s to their balance sheet out of Level Three accounts. Level three assets are assets that the bank can carry at any price they choose. Many of the investments in Level Three usually have no market and therefore it is very difficult to establish their value.

By moving assets out of Level Three to Level Two they now have to figure out a price. Some people think that the value of these SIV’s is between 50 cents to 70 cents on the dollar. When Citibank moved these assets Moody’s lowered the credit rating of the bank. The credit agencies think the bank will have other write downs because of this movement of assets.

When Citi took their write downs for sub-prime loans they left the value of the SIV’s alone ($83 Billion) and carried them at par or face amount, no loss. As other banks will be forced to follow Citibank lead we will get more information as to the magnitude of potential losses in SIV’s. It may well take several quarters into next year till we find out the extent of the credit problem.

Dan Perkins

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