The latest actions taken by the Federal Reserve and World Central Banks have provided additional liquidity to the financial system which will help stabilize the financial system in due time.   The world financial system is now being flooded with cash which should lower lending rates and induce lending. Even Russia injected $20 billion into its system. Hopefully the smart money will come in before confidence is restored. Once the headlines turn more positive, then the dry powder of $3.7 trillion sitting in cash, should gradually flow back into equities. I can't see how money market rates of 2.3% and one month Treasury-bill rates 0.15% will keep money in cash once the worst is behind us.   Short-term performance is often subject to temporary market conditions. The credit crisis will not be with us forever. Unless there is extenuating circumstances, patience will often prove appropriate when short term performance is disappointing. Over longer periods of time disappointing performance can be made up with competitive performance achived during the lions share of the market cycle. Over a market cycle, five years, intermittent weak market conditions that typically occur in a five year cycle generally are made up with subsequent better performance. Understandably, this weak period is far worse than most other periods. The stabilization of the current credit crisis and a bottom in housing are two events that must occur before the market begins to recoup its losses.
 
The risk of loss in underperforming investments can be minimized by sticking with a long term investment horizon of five years. I believe successful investors are successful because they can maintain a long term perspective and are not distracted by short-term events. That's not to say don't reduce your portfolio's exposure to the stock market but instead always strategically own equities in your portfolio for the long run. In most cases, the companies you have in your portfolio are names you want to own.  These stocks aren't broken, they are just not working at the moment because of credit conditions. The stocks in your portfolio could be the stocks that help recoup losses as market conditions change for the better.   The true fundamental value of the stock market is that over the long term, stocks have outperformed all other traditional asset classes. Don't "undervalue" them in your portfolio. You need them for the long term. Roy Neuberger often said that stocks are used to grow your money, bonds provide income, and cash is for liquidity.
 
The equity positions in your portfolio as a whole are ones that will respond well as credit conditions thaw. Also, they tend to lead the market as the economy comes out of a recession. Notable sectors are Industrial, Technology, Energy, and Financial (only a three percent stake) .
 
My advice is to view the market based on your investment horizon and not quarterly or even sometimes yearly basis. Investors will have a better perspective on equity investing and perhaps make better long term decisions. The market is very risky over the short term, however, over the long term the extreme volatility is washed out. 
 
This Bear market like everyone before it is a temporary set-back for long term investors. It's temporary if you can recoup your Bear market losses in the ensuing rally that has always followed. The only way to do that is own a sufficient amount of equities that allows a portfolio to recover its losses. Bear markets come with earning long term market returns in the double digits.   At capitulation points, investors say that "maybe this market is not right for me", I can't stomach stock investing. Usually, at times like today, despondency sets in, and the markets are at a point of maximum opportunity. Successful investing at times requires a contrarian approach. When there is maximum pessimism there is maximum opportunity. Conversely, when there is maximum optimism, wow I feel great and confident, there is maximum risk or limited upside.
 
Given the swings in the market your portfolio could become strategically out of balance if too much is in cash at a market low. If that is the case then your portfolio might be out of position to reap the benefits of an early bull rally that typically begins in recession. I'll admit that no one knows for sure when the market has hit bottom nor do they know when it has topped. However, looking at numerous indicators, it sure looks like the market is moving around a low point or closer to one. 
 
As a long-term investor, the consolidation phase in the securities business, deleveraging of businesses, reform in the mortgage business, will only make the economy better and surviving firms better off in the future. I think being a long term investor increases the odds of having a rewarding experience with many of the investments you own in your portfolio. Just think about the potential for Bank of America in a few years after buying Countrywide and Merrill Lynch. I think in a few years BOA may realize its reward, being a dominant player in the mortgage and security business as well as banking. Banking, mortgages, financial products and securities are all services/products that everyone will  need in 2009 and beyond.  
 

We are living through a painfully historic period which is changing the landscape of the financial industry. Like all previous crises, this one will eventually pass and the markets will be better off just like in the 1930's. I think we are very close to that point.   Be well and enjoy the changing of the season!

Sincerely,
Patrick Byrne, Market Strategist

Market & Economic Commentary   
The current events on Wall Street are disturbing. The events that have taken place this year are unprecedented. The collapse of venerable old line firms and bail out of the Government Sponsored entities could be compared to events in the 1930's. The demise of Bear Stearns, Lehman Brothers, and AIG highlight the systemic strain within the broad financial system that is weighs heavily on the capital markets and now the economy.
 
The past week's events seemed to shock even veterans of past bear markets. We are operating in an environment where a 158-year old firm can go from adequately capitalized to bankruptcy court in five days. Liquidity is an issue even for solvent industry leading companies like AIG. Events are unfolding so fast that analyst research reports have been off the mark. The lack of transparency with company balance sheets is also to blame for the loss of confidence by investors and lenders. The rating agencies are on the war path aggressively downgrading credits making matters worse for solvent profitable companies. Moreover, Hedge fund forced liquidation sales and short sellers are exacerbating an already bad situation. In the midst of all this the credit markets have frozen again. Banks are hoarding cash again.
 
The excessive downward action in the stock market over the last few weeks is all about liquidity, credit, and loss of confidence. If the World Central Banks through their massive worldwide liquidity injections (they are flooding the global markets with cash to avoid a 1930's credit tightening), and the Banks start lending to institutions and individuals (they haven't been lending to anyone except at "loan shark" rates), then much of the downward pressure on the market should be removed. One month Treasury Bill yielding 0.15% (that's zero after taxes) is purely a "panic-to-quality trade". World War II was the last time Treasury yields were this low.
 
In a Bear markets very few asset classes or sectors are spared of losses. This one has spared none. Even Gold was down until today when the news reported that the oldest money market fund in the industry broke a "buck".
 
I sense investor capitulation in the works that could possibly mean a market bottom soon. September and October are two of the worst months on the seasonal calendar for stocks. Chicago Board Options Exchange's Market Volatility Index (VIX), which measures fear in the market, is near its 52-week high of 37.57. The VIX indicator is at market low levels or at least signaling a short term bottom.  Investors have had it with losses and just want to get out.      Markets tend to bottom around events like Lehman bankruptcy and at these sell-off levels. Presently, the market decline is twenty six percent from its high and could approach thirty percent - the typical Bear market decline. The credit "financial" crisis must begin to stabilize for the blood letting to stop.  A sign of a bottom will be Bank lending and narrowing credit yield spreads. In Europe the Fed Funds rate jumped to 6% and while the US rate stood at 1.8%. The spread reflects a demand for dollars and the short supply of dollars - illiquid market! As this rate narrows and other key lending rates credit conditions should improve and confidence should return.  
 
I believe recent events will mark the beginning of the end. The "end" is a process that takes a few months to happen. Beyond the horizon is a recovery - albeit a mild one.  The key to the recovery is improving credit conditions and a bottom in the housing market.

(c) Aspetuck Financial

www.aspetuckfinancial.com