January 24, 2008

Unsettled Markets

This is the early stages of a recovery from the world-wide selling in financial markets.

We were buyers some financial stocks today, but intend to make some sales as things unfold.

An eventful time in the market since my letter of two weeks ago. I write a brief letter to report on our views and actions. The markets were full of anxiety and fell steadily all of last week. Investors and traders hoped for leadership from the Federal Reserve and the US Treasury. Ben Bernanke testified in the House of Representatives on Thursday and George Bush offered somewhat sketchy plans for economic stimulus on Friday. To say that market participants were disappointed with the performance of our officials is an understatement, at best. On Monday, US markets were closed for Martin Luther King’s birthday; but the rest of the world went straight to work and sold everything that could be found to sell. Facing a sharply lower open in New York on Tuesday morning, the Fed announced a sharp cut in interest rates and Treasury Secretary Hank Paulson gave some details on proposed emergency legislation.

A wild day of trading unfolded in US markets, with most markets closing lower. By Wednesday’s trading in the United States, there came a sense that the worst might be over. A fine rally developed, especially in bank and financial stocks. Buying continued at a reasonable pace in overnight trading in Asia and Europe, then in US markets today. During the day, Congressional leaders and the Bush administration reached a tentative deal on the stimulus package.

We have written in several recent letters about the developing opportunity in the bank and financial stocks. Today, we made our first investment in these in many clients’ accounts. The nearby chart updates one from our last letter. The tremendous decline in the prices of the big banks and insurers is well warranted, considering the scope of losses in the last year from their worse-than-foolhardy actions with mortgage-backed securities and other toxic exotica.

Their remarkable failures notwithstanding, the global banks, like Citi and JP Morgan Chase, and the investment bankers and brokers, like Merrill Lynch and Morgan Stanley, have enormously broad, profitable and essential activities around the world. Foreign and domestic investors have been eager to supply new capital as these institutions have taken their losses. For new investors in these institutions--like the sovereign wealth funds and ourselves--last year’s losses are not our problem. Last year’s shareholders suffered those losses, now we new investors can buy these shares at very favorable prices. The plan now is to build on the small, initial positions we took today. In the short term, there may be further selling in financial stocks, but the odds are high that, in the next two years, we will earn handsome investment gains in financials. Or, as that perceptive commentator, Bob Dylan, put it when he was a very young man, “The loser now will be later to win, for the times they are a-changing.”

John N. Mayberry

Having held large cash positions in client account, having avoided investments in financial stocks, we are able to invest in the banks and brokers now, when they are priced at such low levels.

Did a bear market begin when the market first cracked last summer? Is the United States now in a recession? Is one at hand? Will the very successful investments of the last few years--oil, emerging markets and the rest--continue to thrive? Unknowable. Some things seems likely. The very intense selling of the last few weeks is likely to give way to a sharp rally. We may have seen the first of it. After such a rally, we are likely to see at least one more disconcerting wave of selling. As we observe the market’s action in coming weeks, we will form some answers to the questions. Our plan now to sell some positions as the market recovers, against the possibility that this is a bear market. We are alive to the possibility that the appreciation of the euro and of oil-related investments have been very extensive already. A shift in emphasis may be before us.

We will try, as always, to preserve the capital you have entrusted to us and to take advantage of the attractive opportunities before us. Please do not hesitate to call us (800 451 2240 or 415 332 2000) or to send an email (JNMayberry@coreasset.com). We are always ready to listen and to talk.


Each year Core Asset Management files with the SEC a form ADV with information about our company. If you would like a copy of Part II of Form ADV, please contact us.