Thursday, November 20, 2008

Were you lucky enough to own the S&P 500 index at the beginning of the year then you would only be down 47%.

The problem with this headline is that for many people they are off more than 47% on a year to date basis. Today we broke the previous low put in by the Dow Jones. We had successfully tested the previous low several times, but today we closed at a low equal to October 2002 of 7,550.

The S&P 500 faired even worse closing at an 11 year low. The question should be the old Limbo dance question, “How low can you go?” I don’t know. I do know that things seem to be at their worst. They are not as bad as they were in early October, but for a different reason. In October we were concerned, no scared to death, that the world banking system was about to fail.

The world’s central banks spent trillions of dollars shoring up the commercial banks balance sheets so they could begin lending money. While the central bank wanted the commercial banks to lend and they gave them trillions to do so those banks haven’t started lending, at least not yet.

The credit markets are still showing signs of the demand for US Government Securities regardless of maturity. Today the yield on the 10-year T bond fell to 3.01% yet the 30-year mortgage still stands at 6.05%, more than double the yield on the 10-year T-Bonds.

If you wanted to buy and if you could get them, a 90-day T-bill today would earn .02% yield. I had a client call today asking me if I thought it was a good idea to take out of his unused home equity line and put it in the bank?

I said take the money before the bank pulls the home equity line out from under him. He can borrow money at prime minus ¼ of 1 percent and deduct the interest. In his tax bracket he’ll borrow the money at about 2.4% after tax, this is perhaps the cheapest cost of money he will ever see in his lifetime I think the Fed will cut interest rates another 50 basis points in December if not before. This cut by the Fed will reduce the prime rate to 3.5% and will take his home equity interest rate to just about 2% after taxes. This is the second client in the past week who has called with the same question about a home equity loan.

Will all of these low interest rates and strong dollar make the equity markets more appealing? Over time I think they will. I do see exceptional value in the market. I waited and waited on GE and bought it between $15 and $16 only to see it fall to $13. How smart am I? But one client sent me a note that said he thinks for the long-term GE was a great buy. I hope he is right.

As I sit here to write this blog I ask my self these questions? Have I limited my client’s risk and more importantly how secure is their income? The answer is a resounding yes; they will get their checks and for now I don’t have to sell anything for them to get the income they need. As much as I would like to think I could control the markets I’m just along for the ride.

When we have days like these I spend a great deal of time thinking about you, my clients. We own the same things and as one president once said “I feel your pain.” I don’t like it, but I have to deal with it for you and me alike.

Dan Perkins

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