Dear Clients & Friends,
US markets closed this afternoon with the S&P
500 down 4.9%, the NASDAQ down 6.8%, Dow down 7.1% with record volume on the
NYSE. 9 stocks were down for every 2 that were up on the
NYSE; on the NASDAQ losers beat gainers 4:1. Trading systems operated
smoothly. These losses were painful but by no means the worst the markets
have ever seen. For example, on Black Monday, October 1987, the S&P
500 declined 20.5%, and at the outbreak of the Gulf War, the S&P 500
declined 9.7%. We are by no means clear of further declines. During
the Gulf War stocks drifted lower from August through December, only to rally
sharply (by 21%) once the Gulf War was over. So it's possible that net
losses in the averages will approach 6-10% by Friday.
Airlines stocks were hammered as expected with
American Airlines falling 39%, United falling 43%. Boeing fell
17%. Losses in insurance stocks were less dramatic with AXA down
14.1%, Berkshire Hathaway down 5.9% and AIG down 4.4%. Flight to safety
stocks included Pfizer down 0.1%, Johnson & Johnson up 0.4%, Federal
National Mortgage up 2.8%. Losses in large cap technology stocks such as
Oracle, IBM, Cisco, and Sun Micro were in the 4% range. Dell and Microsoft
fell 8%, EMC fell just 1.4%. Defense stocks gained an average of
20%. In aggregate, our clients' accounts, which include bonds as well as
stocks and cash, fell 3.6% on the day.
As we described earlier this morning, the Federal
Reserve Bank cut the funds rate by 0.50% to 3.0%. As we had hoped, the
European Central Bank matched this cut, as did the Canadian Central bank.
These coordinated moves reduce pressure on the US Dollar, which none the less
fell to a 6 month low against the Euro. The Japanese Central
Bank sold yen for dollars earlier in the day to stem the rise of the yen
against the dollar. Bonds gave back some of the substantial gains
registered last week in a flight to safety. Bond yields had moved to
generational lows as the budget surplus allowed the Treasury to reduce the
supply of issues in the market. The budget surplus may well move to a
deficit to finance the coming war, and inflation may pick up as well. So
investors are taking money out of bonds, driving yields higher and prices
lower.
Overall, markets could have done a lot worse
today. For the quarter, the S&P 500 is down 15.2% and 20.8% for the
year. The NASDAQ is down 26.9% for the quarter and down 36.1% for the
year. In our September 5th client letter, we noted that it was unlikely at
that point (prior to the attack) than the averages would turn positive by
year end. We're even further from that chance at this point.
However, the flood of liquidity released by the Fed this past week combined
with lowered short term rates and a burst of spending on rebuilding,
defense and telecommunications infrastructure will, we believe, serve as the
catalyst to get economic growth back on a positive track after 1-2 more quarters
of negative growth. As we pointed out a few weeks ago, these 8 Fed cuts
since January have been the most dramatic moves in interest rate policy, and
it's no longer a question of if but when we start to see the
benefits.
We hope that these daily bulletins have been
helpful over the last 7 days. We were gratified to see that most of our
expectations were fulfilled even though the results are generally negative
for clients' portfolios. Our policy has always been, "When bad news comes,
we want you to hear it from us, first." We will put out a few
more daily bulletins and then switch back to our once every month or two months
schedule. It has been a year and half since we've seen a solid uptrend in
stocks; last week's events have put the recovery on hold once more. And
yet, history shows when people are most despairing of their stock investments,
that's when the best returns are obtained.
Starting next week, we will call all of our clients
to answer specific questions and discuss what can be done for the remainder of
the year. In particular, we will be reviewing accounts with realized gains
from earlier this year and looking to take offsetting losses so that taxes can
be minimized.