October 17, 2008
Message from the desk of James L. Joslin, Chairman & CEO
Given current events, we thought it beneficial to introduce Market Update e-mails to keep you informed in addition to our quarterly letter. Please let us know if you wish to have these intermittent updates sent to a different e-mail address or if you don't wish to receive them at all.
Greetings,
By now you should have received your September 30th quarterly portfolio summaries, as well as our letter discussing the firm's view of the financial market situation. Events during this week, of course, have only heightened concerns about the outlook, adding to the general angst felt by all investors. Since it is October, and the Red Sox are still in the race, perhaps a baseball analogy to illustrate our assessment might be appropriate.
We seem to be faced with three very important financial market problems:
The systemic risk that U.S. and global banking institutions will break down and collapse under the weight of toxic assets on their balance sheets. We appear to be in the eighth inning of the remedial measures underway which the authorities have instituted to rectify this part of the problem. The banking system will not fail. Betting against the Federal Reserve System and U.S. Treasury, in our view, would not be a sound assumption for portfolio investment strategy today.
The credit market malaise. As you are aware, during the past few months, the sense is that bank lending activity on a broad front has stalled, the bond market seems paralyzed, and many conventional sources of mortgage and consumer credit have closed their doors. Here we appear to be in the 3rd or 4th inning of the remedial efforts underway. Many of the larger banks are still wary about counter-party risk, but psychology seems to be improving slowly (GE and California just completed successful refinancings). Having avoided the securitized mortgage fiasco, regional and smaller banks are lending on sound financial profits and capturing market share from their troubled larger competitors. Banks have the capital and liquidity to expand their loan portfolios. What's missing today is trust among players in a market that is built on trust; a fragile foundation that will take time to rebuild.
Uncertainty about the spill-over effect of the troubled financial services turmoil into the real economy. One might say we are into the 2nd inning in our dealings with the inevitable recession most likely already underway. Usually, the economic outlook drives the investment markets. Today, the investment markets seem to be determining the direction of the economy. Key here will be measuring the degree of the downturn and the length of the adjustment. During the coming months, the news will be bleak on most fronts and the media will trumpet concern. However, it isn't clear that the equity markets have not already (at inter-day low last Thursday down 43.5%) discounted the worst and found a bottom late last week. There is an extraordinary amount of equity-destined cash on the sidelines. The Columbus Day buying panic is a good indication of why equity investors cannot afford to move to cash in a major way at times like these.
When thinking about a suitable investment strategy for today's circumstances, it is useful to review history, but, of course, it does seem different this time. Perhaps it is different, but with the past merely as prologue, the values found in today's equity markets, in the U.S. and globally, have not been available in the recent past. Over the years, because of what you own (and don't own), and due to our rebalancing line, your portfolios, although down, are well situated to rebound as market psychology improves.
As always, your thoughts, comments and questions are most welcome. Please contact us via email at tfc@tfcfinancial.com or call us at 617-210-6700.
Regards,
James L. Joslin
Chairman & CEO