Economic & Market Update: February 23, 2009

“Markets Have Another Case of the Mondays”

The Fortigent Investment Research Team

Last Week’s Highlights:

Housing Starts:                            466k – lowest level since inception in 1959

PPI:                                             +0.8% – higher number attributable to energy rebound

CPI:                                             +0.3% – deflation out of the picture for the time being

Stocks:                                             770 

Bonds:                                             2.8% - investors seeking safety once again

Oil:                                                  $40     

Dollar/Euro:                                 $1.29 – picture in Eastern Europe declining quickly

Economics This Week:

Date      Item                                                              Est.                     Comment

2/24      Case Shiller Home Price Index: -18.3%             Prices falling rapidly

2/24      Consumer Confidence:                      36.0              Consumer psyche still weak

2/25      Existing Home Sales:                        4.8mln           Low prices helping yet?

2/27      Revised 4th Quarter GDP:                 -3.8%                  

The Downward Spiral Continues

The recent trend of negative performance stayed alive this week as the Dow closed at a new bear market low.  For those keeping track, this week marked the largest decline of the year for the major indices and also the sixth weekly decline in the first seven weeks of the year.  A host of issues were facing the markets in the holiday-shortened week including possible bank nationalization, poor economic data worldwide and general uncertainty about recently enacted legislation.

Source: StockCharts.com

The impact of this recession on the stock market is truly astonishing.  By the end of January, the S&P 500 index closed out its worst 10-year run of performance since inception of the index.  Inflation was a large detractor over this period as the index lost an annualized 5.1% when adjusted for inflation.  Disregard inflation, and stocks eked out a 0.5% annualized gain. 

Source: New York Times

When considering that the last decade witnessed two recessions, a bubble in technology stocks and the most recent credit crisis, the data is not especially surprising.  For individuals with a long-term investment horizon there is some consolation – periods of underperformance are usually, but not always, followed by periods of significant outperformance. 

So, How is the Average American Holding Up?

Unquestionably we have all heard accounts of the devastating effect of the current crisis on household wealth.  But, up to this point we haven’t really seen a quantifiable way to measure the full impact on individuals’ bottom lines.  That is, until now.  Using data from the Federal Reserve’s “Survey of Consumer Finances” and analysis from a group of economists at “The Baseline Scenario” we now have a quantifiable approximation of the real economic impact on the typical American household.  As expected, household wealth has been devastated in the past two years.

Source: EconomPicData.com

Evidenced by the chart above, the typical household lost about one third of its net worth in the past two years, from $87k down to $57k.  Given that declines in housing and the stock market precipitated a steep erosion in wealth, some economists are now questioning whether consumer’s attitudes towards spending may forever be altered. 

While the numbers are about in line with what one would expect, this analysis does lend credence to the future likelihood of reduced spending on discretionary items in favor of paying down debt and saving for essentials, like retirement, housing and college tuition.

Why Bank Nationalization Might Be the Best (or Only) Option

Rewind six months when we first ran into the thick of this crisis with the collapse of Lehman Brothers and you would be hard pressed to find anyone who thought that bank nationalization was a smart thing to do.  Suddenly, everyone is doing an about face, and the list of notable economists calling for the nationalization of Citigroup and Bank of America is growing rapidly.

Arguments can readily be made for/against the nationalization of banks, but the reality is simple – confidence in the financial institutions, banks in particular, is shattered.  The government has been working on an ad-hoc basis to prop up the financial system though various legislative packages, but so far it does not seem to be having the intended effect.  At this point, the government already has large stakes in each of these banks, so why not go all the way and take over the banks, work to purge toxic assets over the short term before eventually returning both entities to the capital markets as lean and mean financial institutions?

For anyone looking for a historical precedent to such action, just read one of the numerous articles being published on the topic of Swedish bank nationalization during the mid-1990s.  The short story is that Sweden’s banks were effectively bankrupt, forcing the government to take over the banks and troubled assets into a bad bank.  Sweden originally anticipated a 15-year life span for the bad bank but was actually able to sell the bad assets for a net profit and shut down the bank in 4 years. 

About Fortigent:

Fortigent, LLC delivers a fully integrated and customizable business-to-business outsourced wealth management solution to banks, trust companies, and independent advisory firms. Services include an "open architecture" investment platform with particular expertise in alternative investments, a flexible unified managed account program, and consolidated wealth reporting. Fortigent's web-based portal interface allows access to proposal and rebalancing tools, client portfolio reporting and accounting, as well as industry articles, research papers, and other practice management and business development resources.

The information provided is general in nature and is not intended to be, and should not be construed as, investment, legal or tax advice. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based upon information that Fortigent considers reliable, is not guaranteed as to accuracy or completeness.

Not FDIC Insured No Bank Guarantee May Lose Value

(c) Fortigent, LLC

www.fortigent.com