October 24, 2008
Message from the desk of James L. Joslin, Chairman & CEO
Greetings,
We won't burden you with these messages too often, but after another week of turmoil for investors (more Federal fiscal remedies, additional monetary stimuli, another major decline in stock prices), the unending bout of negatives continue. However, the credit market freeze is beginning to thaw, and although relief for equity investors still seems distant, some faint constructive signals seem to be on the horizon. Will the recent stock market bottom be tested once again? Will the seemingly endless stream of bleak news ever taper off?
By some estimates, the U.S. Treasury and Federal Reserve Bank will have pumped an additional $1.3 trillion into our banking system and credit markets by year-end. Lenders, perhaps with the exception of insurance companies, are suddenly afloat in reserves and capital. U.S. consumers have become more conservative, many shifting to a net savings mode. Housing prices continue to weaken with no apparent bottom in sight. Recession, it seems, is on everyone's mind. The "I" word seems to creep into conversations about the economic and financial market outlook; not much solace for weary equity investors who have already had to endure weeks of bearish news without yet any signs of a turnaround. Further, the news, in the winter months ahead at least, promises no let up in its relentless media drumbeat of pessimism.
But here is a checklist summarizing, if not a bullish case, reasons not to be totally despondent:
1. After a slow start, our Government's fiscal policy response, unlike its European counterparts, has been decisive and appropriate.
2. Massive amounts of investment market-destined cash remains on the sidelines.
3. A large amount of recent, government-infused bank capital has yet to be deployed in expanded lending activities. Yes, more banks will go under, but the system is far stronger than it was at the beginning of the 1990 S&L crisis.
4. The "real" economy is in recession, and possibly has been so since the end of 2007. But it was a widely predicted slow-down (although the degree of the downturn was not expected) with most operating companies having adequate balance sheets and strong cash flow, and inventories carefully controlled. Also, during the past few years, corporate capital spending has not exceeded needs, payrolls have been better managed, and labor productivity improvement has allowed corporate profit margin maintenance.
5. Energy prices are down, as are other natural resource costs. Consumers will probably repay debt with these savings, and with this short-term windfall regain some confidence in the outlook.
6. As the housing bubble continues to deflate and find a bottom, and energy costs further decline, inflationary expectations will continue to recede.
The negative side of the case is well publicized and taken as accepted wisdom today. Should the result of some of these points mentioned above materialize, a greatly over-sold market could respond unexpectedly. Particularly after the election on November 4th, the first reaction could be a sharp turnaround in confidence, followed by the realization that the operating economy slowdown might be shorter than touted by the media; and the subsequent economic rebound could be stronger than anticipated. Lower inflationary expectations could also reinforce a more optimistic view of the short-term outlook and place a floor under equity market price/earnings multiples. The sense of relief in the near term might be palpable, but in the longer term much still remains to be resolved. In the U.S. we have recognized and are attempting to remedy our problems sooner than others around the globe. So the pain has been felt in our markets first. It may be that the rebound also begins here first also.
The fall-out from all of this promises to be new investment opportunities which we expect to capture in portfolio realignment programs undertaken in the months ahead. As mentioned in our October quarterly letter and last week's e-mail, we are beginning to see values in the investment real estate and emerging market sectors that are very attractive, and we will be taking advantage of these opportunities in the weeks ahead as the markets stabilize.
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.
Sincerely,
James L. Joslin
Chairman & CEO
PS. If you have further interest and would like to read the opinions of others for whom we have high regard, I draw your attention to a Wall Street Journal article by Professor Burton Malkiel published on October 13th. Professor Malkiel was Jack Bogle's thesis advisor at Princeton, and for many years has served as a Vanguard Group Board member. We find Malkiel's portfolio strategy very much in alignment with ours.
(We would have liked to send as an attachment, but copyright laws prevent us from doing so. Therefore, see link below.)