A panic epidemic has hit stock markets worldwide. The sharp decline during the month of September has hastened into an extraordinary meltdown. At the time that I am writing this, the S&P 500 is down almost 40% for 2008. It is difficult to describe the condition of investments other than to characterize the last two weeks as historic. Stock market levels are back to their early 2003 levels. Since the market first reached these levels in 1998, stocks have not made money for a ten year holding period. Indeed, we are dealing with an unprecedented decline for which there seems to be no end.
There has been a call for government intervention to somehow prevent further deterioration. Somehow people expect the government to support values. It is dubious if this could be done and so far, nothing the government has done has worked. Policies aimed at stabilizing the markets have only seemed to push things over the edge.
Paradoxically, the short sale restriction imposed by the SEC on September 19th did nothing but usher in this crash. This is an example of the lack of understanding by policy makers. Since that date the market has fallen 25%. Leading up to that regulation, the stock market had been fairly stable. The failures of Lehman, Washington Mutual, AIG, and Wachovia all happened in September, but prohibiting short selling would not have saved those companies. Short selling inherently creates demand for stocks as short sellers create pent up buying for stocks as short sellers cover their positions.
The Troubled Asset Relief Program (TARP) passed by congress will assist the repair of the credit crisis but it did not help the stock market. In addition, the Federal Government’s resolution to insure commercial paper is perceived as another action that will impair the financial position of the government.
In 1974 Richard Nixon imposed the famous 90 day wage and price controls in an effort to stem the spiraling inflation. When this period expired inflation spiked to then unprecedented levels. This was an example of government using policies aimed toward fixing a problem but without understanding other repercussions.
It is troubling that there is so much confusion over cause and effect. While the recipes put forth to stabilize our financial situation could work in the long term, it seems like the success of the actual policies would be dictated by other random forces. When government officials and politicians wax about this crisis, they sound like they must have slept through their economics courses in college.
The High Cost of Optimism
Investment professionals are an optimistic bunch by nature. Their craft is grounded in the persistent faith that the stock market has risen over the long term.
There is also the shared ideal that hard work and diligence will lead to profit for investors. Most often, a buy and hold strategy is revered as the most successful approach to investing.
You would think that the leadership of Bear Sterns, Lehman, Merrill Lynch, AIG, and Wachovia are grounded in confidence and delusions of success. Yet following these leaders led to financial ruin. Was positive thinking to blame?
Over the past several weeks financial planning programs all endorsed “staying in the game” and “this too shall pass”. The recent stock market crash and loss of investment valuations highlights just how expensive this optimism is. Never in my career has a buy and hold strategy cost more. It certainly appears as though optimism by investors was built on little more than wishful thinking. Perhaps the end to the decline in the stock market will come when all of the positive thinking finally evaporates.
Peregrine Returns and Strategy
The Peregrine Equity composite was down 6.07% for the quarter and is down 16.34% year to date. Our Balanced Composite was down 1.69% for the quarter and is down 5.37% year to date. So far, this has been the worst year for our composites in our firm’s history.
I have strongly considered selling all of our firm’s stocks during this recent crisis. The driving factor against this action was the chance that I might pick the wrong day to sell. During the depths of the selloff, such as what we have seen over the past two weeks, it has been evident that the wrong sale date would be detrimental.
We still continue to trim many of our holdings. So far, the stocks that we sold have continued to slide. Sadly, many of these declines have been much greater than any of our winners during good times.
Our primary focus is to protect our portfolios against further decline without selling everything as capitulation. Using history as a guide, the current descent should begin to ebb within two weeks and we will be able establish a new view on the prospects for the stock market.
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.
Do you have questions or would you like to know more, contact Dan Botti.