THE VIRTUS VIEW

Good afternoon to all.

Based on the recent surveys we sent to our clients, we received excellent feedback on how we here at Virtus Wealth Management can continue to add value to your life.  One of the ideas that was consistently mentioned was that many of you would like more communication on what I think about current market conditions, investments, and economic news.  With that in mind, I am introducing “The Virtus View,” a weekly e-mail sent to you for informational purposes.

This communication is intended to add value to your life by helping you understand the real news versus white noise, other alternative investments out there that you might not be aware of at this time and important economic events occurring or about to occur.  The weekly e-mail will be sent to both clients as well as individuals we are currently hoping become future clients.  Thus, to my valued clients, since we use many alternative investments in your portfolio currently, some of the e-mails might discuss assets that you already understand.  It never hurts to review your knowledge of those investments.

Please feel free to forward these e-mails to any friends you have who you believe will benefit from learning more about finances and investments.

For this first weekly communication, I wanted to discuss the current crisis in the credit markets.  This e-mail will be longer than most due to the complexity of the issues we are facing right now.  Please bare with me.   As you probably are aware, Freddie Mac and Fannie were bailed out, Lehman filed for bankruptcy, Bear Stearns was bailed out by the government and J.P. Morgan, Merrill Lynch was acquired by Bank of America at a steep discount due to Merrill’s credit issues, and AIG was bailed out.  And as I write this, the Fed and the ECB (Europe’s Central Bank) have pumped billions into the money markets.  

It is important in these times to review history.  As a firm believer that history repeats itself, many times we can learn much from reviewing likewise events in our past.  However, in this case, I must note that no time in our history has Fannie and Freddie Mac been bailed out and two of the largest investment banks gone under in a couple month span.  It is not my intent to further the panic and over-reaction out there, just to ensure people understand that this time it IS different.  I will not bore you with the details, but suffice to say, the mortgage problems are not all behind us.

Also, if one is looking to point fingers, please don’t point them at mortgage companies and banks.  The Fed is directly responsible for this mess.  Starting in 1999, the Fed has continually pumped liquidity in the markets.  After 9/11 and the problems in 2002, the liquidity intensified.  And here we are again with the fed opening their discount window, allowing banks to use assets as collateral which historically has never been used, and then pumping billions into the markets to prevent a complete meltdown.  When you pump that much money into a market you get bubbles.  It created the stock bubble, the R/E bubble, and maybe even the commodities bubble.  

So what now?  First, let’s discuss the markets.  I, as well as no one else, have any idea when the markets will stop dropping much less start rising again.  But keep in mind that historically, the markets start moving up 6-9 months prior to the end of a recession.  As you have heard before, past performance is not always indicative of future performance.  However, I will state again, it is my experience that it is important to follow the trend.  Don’t try to guess, don’t be bottom fishers, and stop thinking like this is the bull market of the 90s.  As the old adage goes, the trend is your friend.  As you know, we have been sitting on more cash than usual.  As many of my colleagues were saying we hit a bottom in July, I have stated that I would like to see us re-test the lows before getting too excited.  As you can see the in the chart below, we continue to see lower highs and lower lows.  For those of us sitting on cash, this is no reason to go and buy any new stocks now.  Be patient.  For the stocks we currently own, do not sell unless you need cash.  We are at the bottom of the channel.  Wait for a rally and sell into a rally if you feel the need to do so.

 

For those of you with 60% or more in stocks, please come talk to me about diversifying your portfolio into alternative investments.  Some of the weekly Virtus View’s will focus on these alternative assets and why diversification is extremely important.

Now that we discussed the markets, what about the economy?  Inflation, inflation, inflation, or worse stagflation.  The Fed is pumping so much liquidity into this market that when the economy turns, keep a close eye on inflation.  I am not stating that the Fed’s decision to pump billions into money markets is wrong at this time.  We need to take action to prevent a deep recession.  My point is that ad hoc fiscal and monetary policies have repercussions.  Taking any drastic measure creates other problems down the road.  

Before the banking meltdown, we were in the midst of an inflationary period, which was much worse than the Fed wanted people to believe.  We know that there is a significant probability that the stock market rebounds in the future and has better years.  One can look at 1987 to see that bad times are followed by good times.  However, if the inflationary period returns and we start see 2% to 4% annual inflation rates again, be concerned.  For example, if this is 1987 again and it takes 3 years to get back to even, keep in mind that due to inflation (or your purchasing power) you really aren’t at even.  It is very important going forward you have inflation hedge investments in your portfolio.  For those thinking about moving dollars to CDs and treasuries, it is my belief you will find yourself in a deeper hole 3-5 years out.   To compound the problem, the main action the Fed will take to curb inflation, if and when it becomes a problem, will be to raise interest rates again.  Raising rates while simultaneously trying to recover from a recession is tricky, at best.  Many of my colleagues are too focused on wage inflation.  There is the myth that inflation only occurs with wage increases.  This myth has been proven wrong many times.

The bottom line is that this situation we are in is bad.  Don’t let anyone sugar coat it for you. I believe those with a strategy that addresses market risk and inflation risk and who stick with it and don’t panic will be the investors better off in the future.  We have a strategy of diversifying into many asset classes, not being over-weighted in stocks, making sure we emphasize the real return (return less inflation), and understanding that your goals are the big picture while the investments are how we get there.  For my clients, we have those strategies in place.  For my future clients, use this as an educational tool to get going.  Please feel free to contact me if I can be of any assistance.

Best Regards,

Brian Tillotson - 2435 East Southlake Boulevard - Suite 120 - Southlake, TX 76092
817-717-3812   817-416-6585 FAX
www.virtuswealth.com    

Securities & Advisory Services Offered through VSR Financial Services, Inc., A Registered Investment Adviser and Member FINRA/SIPC

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