Coping Skills for a Bear Market

“These recent events offer a ringing endorsement of broad diversification and a consistent portfolio strategy as the best way to deal with uncertainty.” – Weston J. Wellington.

Ron Lieber writes the Your Money column for The New York Times. His beat covers everything from credit cards, student loans, frequent flier miles, paying bills online to tips on negotiating the buying of a house.

Lately, he has written two interesting columns on investing during a Bear Market.

On September 13th, he wrote Memo to the Uneasy Investor: Be Strong.

He argued against the temptation “to climb under the covers, money safely in the mattress, and hide from a world that has surely changed forever.”

He recognizes that our psychological makeup may not be suitable to successful investing.

Your natural inclination is probably to sell everything and invest in certificates of deposit or throw the proceeds in a money market fund. In fact, evolution insists on these feelings.

“We had survival mechanisms built in to avoid sitting around debating whether we should run away from the saber-toothed tiger,” Mr. Benningfield said. “That’s the fundamental problem with long-term investing. Our skills aren’t really that transferable to the challenges involved.”

But he counsels being brave and following your plan.

Investing in the middle of market gyrations isn’t just a question of controlling the urge to sell indiscriminately. It’s also about taking a close look at the contents of your portfolio and then forcing yourself to fix an asset allocation that is out of whack and to buy in sectors of the markets that are out of favor.

On September 27th Lieber delved into psychology more fully in The Financial Adviser as Hand-Holder. He interviewed “financial planners and investment advisers who got their start as psychologists or studied the field as graduate students, plus a few ringers who are adept observers of minds and money, even though they have formal training only in the latter.”

I asked them this: At this troubling moment, what’s the best way to reorient how we think about money, before we make any rash decisions about what to do with whatever we have left?

Their conclusions include “the markets will eventually recover” and “We have time on our sides.”

Managing our money is a process that unfolds over decades, not days. It’s easy to forget that, when one company after another is falling victim, week after week, and we can track their disintegration on an hourly basis.

“I think reminding people in this environment of why we’ve chosen the investment strategy that we have is a good thing for those who are a little bit antsy,” said Constance Barber, a certified financial planner with Barber Financial in Natick, Mass., who got her start as a school psychologist. “We’ve usually not set this up because it’s money that you’ll need tomorrow.”

Even if we don’t need the money right now, it doesn’t feel good to look at a retirement portfolio and find that it’s down 15 percent from its peak a year ago.

“People rely on selective memory when they’re only looking at losses from the high point that the portfolio reached,” said Victoria Collins, who has a Ph.D. in social psychology from the University of California, Berkeley and has worked as a certified financial planner for more than two decades.

This was a point echoed by many people I spoke with this week. On one hand, it’s certainly depressing to be down to $340,000 from $400,000, for instance. The basic math doesn’t help the mood either, given that after a decline of 15 percent, a portfolio needs to gain 17.6 percent just to get back to $400,000 again.

We can mimic that mindset if we choose, or we can consider what our balance was, say, a decade ago. Chances are we’ve made a lot of progress since then, if we’ve been saving all along. “There are clients who will say, ‘Yes, it’s down, but look where I started,’ ” said Ms. Barber, the former school psychologist. “ ‘I’m hanging in there, and we’ve come a long way, baby, and it’s O.K. for now.’ ”

One tricky part about the last several weeks is confronting all the headlines declaring this the worst financial crisis since the 1930s. “Most of the individuals that I find who need more handholding are the ones who’ve had some connection with the Great Depression,” says Ms. Collins, the Berkeley Ph.D., who is now an executive vice president and principal with Keller Group Investment Management in Irvine, Calif.

These people tend to be retirees, who may have had parents who told them stories about living through the 1930s or are old enough to remember it themselves. If they have little or no earning capacity now, they feel especially helpless when they see parts of their portfolios disappearing.

“I try to remind them that even they don’t need all of that portfolio today,” she said. “You’re only withdrawing a certain amount.”

Ms. Rich suggested that people reach out to someone else to discuss their situation if they don’t have a hybrid financial adviser-shrink to counsel them through the crisis. It could be a peer, a family member, a member of the clergy or staff at a senior center.

My Perspective

Bear Markets are neither unusual nor unexpected. Depending on exactly how you count, we have had 13 Bear Markets since World War II.

Repeat after me, “Bear Markets happen.” Stock prices fluctuate. Risk shows up at unexpected times.

If you cannot accept that, you might consider keeping your money in CDs. But if you follow that strategy, you have little chance of earning a decent return. In fact, after taxes and after inflation, you may achieve a negative return. Your strategy may appear to be less risky, but, in my opinion, you are fooling yourself.

Over the long term, taking on acceptable risk through a diversified portfolio of stocks, bonds, money market funds and other investments will pay off in higher returns. If you had ignored all of the Bear Markets since World War II and had kept fully invested in such a portfolio, you would be way ahead of someone who followed a very conservative approach.

For a discussion of why we should accept Bear Markets see my earlier post.

photo credit: mitchgibis

Investment Lessons from a Big Dog: No New Tricks

“By following a disciplined policy of maintaining a well-diversified set of portfolio exposures, regardless of market zigs and zags, investors establish the conditions for long-run success.” – David Swensen.

I recently attended a meeting hosted by a very large financial services company about their approach to investment management. This presentation was given to a group of financial planners in Northern New Jersey, and the goal was to identify those planners who would like to outsource the money management portion of their practice.

This company manages almost $200 billion in assets for pension funds, wealthy individuals, not-for-profits, and financial institutions. They had a marvelous bound handout with great graphics. And they used some very impressive terminology such as Distribution-Focused Strategies and Total Return Investing.

However, after listening to their sales pitch and reading through the propaganda, I remain unconvinced that they are doing anything that innovative, at least when compared to that which an experienced financial planner already does. Because using them would only add an additional layer of fees and not provide any significant value, I was not interested in using their services.

Their presentation, though, brought up several valid points that you should consider in managing your own affairs or when finding a financial planner. Summarizing the key points to consider in creating a portfolio:

• Your Goals
• Your Time Horizon
• Your Risk Tolerance

All of these are inter-related, and it is important to remember that the real risk is not meeting your goals.

In creating and managing a portfolio, the basic factors are the same for everyone:

• Asset Allocation
• Costs
• Tax Management

Keeping these basic, yet profound, concepts in mind will serve you well over the long term.

The Total Return Investing concept is actually valid and quite useful, and worth explaining. What is implied from that term is that investment decisions should be based on total returns, not just interest and dividends. Many people looking for an amount to replace a paycheck in retirement, for example, often focus only on the yield of their portfolio. This translates to dividends and interest income.

There are three reasons, though, why the Total Return Investing strategy is at a disadvantage.

First, while interest and dividends appear to be something you can count on, only about 20-25% of stocks actually pay dividends. If you excluded the rest merely because they don’t pay out dividends, you are excluding the majority of companies.

Second, dividends are not always secure; they can be reduced or eliminated. Loading up on stocks that pay a high dividend can be riskier than you thought.

Third, when investors realize that the projected income is not going to be “enough” to meet their goals, they frequently “reach” for yield by either buying riskier bonds that promise to pay higher returns, or they buy longer term bonds, which ordinarily pay more in interest. Unfortunately, as we have seen recently, if you buy riskier bonds you may suffer a substantial loss, rather than get a higher yield. And if you buy longer term bonds, you will lose principal if and when interest rates go up.

Fourth, you are not likely to keep up with inflation, if you concentrate too much on current yield. To keep up with inflation, you need to own equities.

I am not suggesting that you should avoid bonds in your portfolio, only that they are usually not sufficient for most people.

As I said, these concepts are standard operating procedure for experienced investment managers. I just thought that their importance bore repeating.

photo credit: mahalie

Shouting “Fire!” in the Middle of a Conflagration

Amazing! Jon Friedman of MarketWatch believes the press has been too prudent in describing the financial meltdown. In his commentary, Media shouldn’t shy away from explosive language, he accuses journalists of “hedging their bets and falling back on imprecise, sugar-coated language.” Friedman would “prefer bluntness and brutal truth.” He wants to call a meltdown a meltdown. “Bloodbath” would be even better, in his opinion.

You can call me a cockeyed optimist, but all I want to know is where has this guy been all this time? The U.S. government is proposing a $700 BILLION bailout. A number of economists have been quoted as saying that this is “the worst financial crisis since the Great Depression.” Do we really need stronger adjectives to describe the financial meltdown more clearly? I don’t think so.

I’ve been saving the front page of The Wall Street Journal all this week, I guess for posterity. Almost every day there have been large font headlines which have included the words Crisis and Failure. Depending on Congress, we may see Panic added to that any day now.

Aside from the headlines, the stories have made reference to “credit freezing,” “backstopping Money Market Mutual funds,” and “banks being afraid to lend to each other.” Do journalists really need to dramatize these events more? Once again, the answer is no.

We’ve had several large financial institutions disappearing over the last couple of months. Companies that are being bought under pressure, going bankrupt, taken over, or “saved” by the U.S. government include: AIG, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and now, Washington Mutual. Have I left any out? Well I guess you could include Merrill Lynch on the “sick but saved” list, just without the help of the federal government.

Just today, CNN.com had an article assuring us that there would NOT be another Great Depression. Even six weeks ago, who would have imagined that such reassurances would be necessary?

So PLEEZE, don’t talk to me about the press being too “prudent and proper.”

photo credit: megananne

Bear Markets: A Necessary Evil

“Bear markets are the mechanism that serves to transfer assets from those with weak stomachs and without investment plans to those with well-thought-out plans—with the anticipation of bear markets built into the plans—and the discipline to adhere to those plans.” – Larry Swedroe.

The author of The Only Guide to a Winning Investment Strategy You’ll Ever Need: The Way Smart Money Preserves Wealth Today, Larry Swedroe always writes clearly and succinctly, and he conveys a great deal of information in a short time. 

This post is a summary of his excellent column Bear Markets: A Necessary Evil.  It is the best article I have read on investing strategy in general and during a Bear Market, in particular.

If you are a serious student of investing, I highly, highly recommend that you read the entire article, which obviously has more detail than this summary.

A necessary evil can be defined as an unpleasant necessity; something that is unpleasant or undesirable but is needed to achieve a result. An example of a necessary evil might be taxes. Investors should also view bear markets as a necessary evil.

His key point is important, but subtle:

Perhaps the most basic principle of modern financial theory is that risk and expected return are related. We know that stocks are riskier than one-month Treasury bills (which is considered the benchmark riskless instrument). Since they are riskier, the only logical explanation for investing in stocks is that they must provide a higher expected return. However, if stocks always provided higher returns than one-month Treasury bills (the expected always occurred) investing in stocks would not entail any risk—and there would be no risk premium.

Bear markets are necessary to the creation of the large equity risk premium we have experienced. Thus, if investors want stocks to provide high expected returns, bear markets, while painful to endure, should be considered a necessary evil.

Risk Premiums and Investment Discipline

“The bottom line is that the outperformance of stocks relative to Treasury bills” entails risk.

And it is a virtual certainty that the risks will show up from time to time. Unfortunately, we cannot know when, or for how long, the periods of underperformance will last, nor how severe they will be.

It is during the periods of underperformance when investor discipline is tested. Unfortunately, the evidence suggests that most investors significantly underperform both the stock market and the very mutual funds in which they invest.

The reason for the underperformance is that investors act like generals fighting the last war. They observe yesterday’s winners and jump on the bandwagon— buying high—and they observe yesterday’s losers and abandon ship—selling low.

Why most investors fail

1. Investors allow their emotions to impact their investment decisions. In bull markets, greed and envy take over and risk is overlooked. In bear markets, fear and panic take over, and even the well-thought-out plans can end up in the trash heap of emotions.

2. Investors are overconfident of their ability to deal with risk when it inevitably shows up.

3. Investors often treat the likely (stocks will outperform Treasury bills) as certain and the unlikely (a severe bear market) as impossible. The result is that they take more risk than is appropriate—and when the risks show up they are “forced” to sell.

The Keys to Successful Investing

1. The first key to successful investing is to have a well-thought-out plan. That plan includes an understanding of the nature of the risks of investing. That means accepting that bear markets are inevitable and must be built into the plan.

2. Those investors that avoid excessive risk taking are the ones most likely to be able to stay the course and avoid the buy high/sell low pattern that bedevils most investors.

3. Understand that trying to time the market is a loser’s game. A loser’s game is one that while it is possible to win, the odds of doing so are so low that it is not prudent to try.

Summary

It is difficult for most individuals to control their emotions—emotions of greed and envy in bull markets and fear and panic in bear markets.

Bear markets are a necessary evil in that their existence is the very reason that the stock market has provided the large risk premium and the high return that investors have had the opportunity to earn.

But there is another important point that investors need to understand about bear markets. Investors in the accumulation phase of their investment careers should actually view bear markets not just as a necessary evil, but also as a good thing. The reason is that bear markets provide those investors (at least those that have the discipline to adhere to their plan) with the opportunity to buy stocks at lower prices, increasing expected returns.

It is only those that are in the withdrawal phase (e.g., retirees) that should fear bear markets. The reason is that withdrawals make it more difficult to maintain the portfolio’s value over the long term. Thus, investors in the withdrawal phase have a lesser ability to take risk and should build that into their plan.

The bottom line for investors is this: If you don’t have a plan, immediately sit down and develop one. Make sure the plan anticipates bear markets and outlines what actions you will take when they occur (doing so when you are not under the stress that bear markets create).

To repeat, this entire post is a summary of Larry Swedroe’s article.

The words are his; I just happen to agree with them wholeheartedly.

Criticism of the U.S. Bailout Plan, Part 3

“There is only one thing necessary to understanding what is happening and it is this: no one at US banks, no one at the Federal Reserve and no one in politics can accept the reality that real estate assets in this country remain oversupplied, overpriced and overleveraged.” – Greg Newton.

A Nation of Morons, Led by Idiots by Greg Newton is a humorous take on the government’s proposed bailout.

Maybe it’s not so funny.

Criticism of the U.S. Bailout Plan, Part 2

“The Devil Is In The Details” – Proverb

Paul Krugman is a Princeton Economics professor and columnist for The New York Times. In his September 22nd column Cash for Trash, he claims that although Treasury Secretary Henry Paulson is “a smart guy” as far as his plan to bail out banks, “He’s making it up as he goes along, just like the rest of us.”

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?
Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

Criticism of the U.S. Bailout Plan, Part 1

“The Devil Is In The Details” – Proverb

Joe Nocera’s September 19th column Hoping a Hail Mary Pass Connects in The New York Times offers some cogent criticisms of the U.S. government’s bailout program.

… the financial system has seized up. But so far, the government’s actions haven’t helped. Letting Lehman go bust may have sounded good at the time, but it has had disastrous consequences.”

It has led to complete chaos in the multitrillion-dollar market for credit-default swaps and was a crucial reason Morgan Stanley was forced to scramble to stay alive this week. It is also why questions were raised about the viability of Goldman Sachs, a firm with a pristine balance sheet and almost none of the bad assets that are bringing down other firms.

The rescue of A.I.G. further undermined confidence because, within the space of several days, the government did a complete about-face. The bailout suggested the Treasury Department was as confused about what to do as the rest of us.

So rather than help solve the crisis, the Treasury Department has actually contributed to the biggest problem in the market right now: an utter lack of confidence.

Nocera thinks that Criticizing Short Sellers is misleading at best.

The idea that short sellers are the cause of the problem “is more myth than fact, and in any case, it’s not the dynamic here.”

Stocks are falling because companies made huge mistakes that have caused them a heap of trouble. Indeed, in July and August, short interest in financial stocks declined by 20 percent. Why did the stocks continue to go down? Because there were too many sellers and not enough buyers: it’s that confidence thing again. Blaming the shorts is classic blame-the-messenger behavior.

While agreeing that we should save the Money Market Funds, he raises the question of moral hazard.

It bails out poorly managed money funds — the ones most likely to break the buck — at the expense of funds that haven’t taken the extra risk that causes a sudden drop in value.

And then there’s this: If you have your money in a bank account, only $100,000 is insured. But if you have it in a money market fund — which usually has a slightly higher yield precisely because it has a small element of risk — you now have unlimited insurance. It’s the world turned upside down.

Finally, when it comes to the actual Buying of Distressed Assets by the government, Nocera asks

How is the government going to assess these securities — and what price will it pay for them? In many cases, these securities aren’t being sold because they are still overvalued on a firms’ books. That is, their mark-to-market price is unrealistically high. Will the government buy it at the too-high price? If it does, the firms won’t have to take additional write-downs — but it will constitute a huge, unjustified bailout of Wall Street. (More moral hazard.)

But what if the government drives a hard bargain, and gets the securities for what they are really worth — 20 cents on the dollar, say, instead of 50 cents? In that case, the firms would have to take yet more enormous write-offs, which would further damage their balance sheets, and they would have to raise billions more in capital. Maybe the removal of these bad assets would allow the firms to raise the capital. But maybe not — meaning one or more could conceivably have to file for bankruptcy, creating yet another spasm of financial turmoil. It’s a huge roll of the dice by the government.

In conclusion, he says, “As much as we all hope the worst is over, it’s probably not.
And as much as we might hope that the government finally has the answer, it probably doesn’t.”

Not pretty, but there it is.

Remaining Calm While Stock Prices Plummet

“If you can keep your head when all about you
Are losing theirs and blaming it on you” – Rudyard Kipling.

Based on today’s results on Wall Street, it looks like we are in for another roller coaster ride this week. Even though we emphasize long term investing, it is difficult to ignore such wild swings in stock prices.

According to a recent column in the Wall Street Journal, “The U.S. financial system last week was rocked by the biggest crisis since the 1930s — and the federal government responded with a multi-pronged intervention that is the most sweeping since the New Deal.”

We do not yet know how much the bail-out plan will ultimately cost the American taxpayer, nor do we know how it will be implemented or how it will all turn out in the end. There are, naturally, dissenters who question the plan or at least some of its ramifications, especially the issue of moral hazard. (More about that later).

That said, I would like to take a moment to recognize Brett Arends, a columnist, who counseled calm and restraint, before and during the stock market’s turmoil. Brett Arends writes R.O.I., or Return on Investment, daily for the Online Journal. On the evening of September 17th, after the Dow Jones Industrial Average had fallen by 450 points, when most people were extremely nervous, Arends put out a video called Reasons to Stay in the Market.

He advised investors not to overreact, and that after such a fall in prices, it is a better time to be buying, rather than selling.

On the morning of September 18th, before the new U.S. government intervention was announced, he followed up with a column called Ten Reasons Not to Sell Your Stocks.

“I’ve seen this sort of panic enough times to have a little perspective. I’m certainly not urging you to rush out and put all your money into the stock market. Your investments should be based on your own financial situation first, and the situation in the markets second.”

Arends added, “If you are panicking and getting ready to sell everything and hide under a rock, here are ten reasons why you shouldn’t.”

1. Oil prices just slumped.
2. Mortgage rates have tumbled.
3. A measure on Wall Street known as the “Vix” just went through the roof.
4. Uncle Sam is finally waking up and getting involved in the crisis.
5. There’s an old Wall Street saying: The time to buy is when there’s blood on the streets.
6. Even one of the most notorious bears is starting to concede some shares are reasonably valued.
7. Big money managers are bearish.
8. If you sell everything and move your money into “safe” places like cash or bonds, you will be running right smack into another risk: inflation.
9. The housing market is about to get two big doses of help.
10. America is finally getting the wake up call it needed.

I’d like to highlight and comment on a few of his “reasons.”

4. Uncle Sam is finally waking up and getting involved in the crisis.

Better late than never. If Mr. Bernanke and Mr. Paulson had taken strong, clear action a year ago, maybe some of these blow ups might have been averted, or minimized. But it’s good news that they stepped in during the AIG debacle, and it’s good news they are letting other firms swap illiquid assets for cash.

Arends wrote these comments before the big bailout proposal was announced. While it is true that the details have to be worked out and agreed upon, on the table (finally) is a comprehensive plan that aims to restore confidence and allow banks to do what they are supposed to do – raise money from investors and lend money to consumers and businesses.

As mentioned in a previous post, we have been going from one crisis to another, using a case-by-case approach that just has not worked.

5. There’s an old Wall Street saying: The time to buy is when there’s blood on the streets.

How about now? Blood isn’t just on the streets – we’re hip deep in the stuff.
There are no guarantees, but history has usually been pretty kind to those who invested after the market had plunged this far and just hung on for years. Sure, there may be plenty more bad news to come. But the collapse in share prices has already priced plenty of that in. Investors are, at long last, getting paid something for taking the risk of owning equities.

Fair enough. By the way, it was Baron Nathan Rothschild, an 18th century British financier, who has been quoted as advising, “The time to invest is when there is blood in the streets.” In other words, buy when everyone else is selling out of fear. This maxim may be easier said than acted upon.

We have definitely gone through a very rough patch, when fear was endemic. At a minimum, it is usually not a good time to sell when everyone is panicking. And after stock prices have fallen, the expected return in the future is higher, not lower.

8. If you sell everything and move your money into “safe” places like cash or bonds, you will be running right smack into another risk: inflation.

Savings account are a great place to keep ready money, but not for long term investments. They are only paying maybe 3% before tax. As for long-term Treasuries? These so-called “safe” investments are fool’s gold. They’re yielding barely 4%, again before tax. I wouldn’t buy them with counterfeit money.

In my opinion, this is a bit of an exaggeration, but I can see his point. Preserving purchasing power is just as important as preserving capital. But bonds do have a place in a properly diversified portfolio. In any event, research shows that short-term bonds have a better risk- return profile than long term bonds.

10. America is finally getting the wake up call it needed.

We’ve been living in a funny-money economy for years. Everyone from college kids to the federal government has been surviving on credit card debt and pretending it could go on forever. It was impossible to get really positive again until that came to an end. It takes a real shock for that to happen. Like this one.

Yes, we are all paying attention now, which is a good thing. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have turned themselves into the new 21st Century version of the “Dynamic Duo,” impressing upon Democrats and Republicans the importance of working together as a team, for the good of the country.

We’ve had other financial crises in the past, so it helps to have some perspective. When you are living through a tough time, it always seems unprecedented. (This one sure does!) But we have solved serious problems before. From past experience, it is realistic to be a long term optimist.

Conclusion

I advise clients not to follow the stock market on a short term basis, but how can you not, when the evening news leads with it almost every single night? It’s as though the news consists of the stock market/credit crisis first, and then everything else. It almost makes you wish for a good old fashioned political sex scandal, just for a change of pace.

Could things get worse yet? Yes, but, then again, maybe not. If you have a diversified portfolio, based on a sensible long-term plan, stick with it. Talk to your advisor about rebalancing and possible tax loss harvesting. If you have a very concentrated position in one stock, irrespective of which stock it is, consider selling some of it and investing in a more diversified portfolio.

photo credit: Vibrant Spirit

Political Movie – “The Best Man”

I recently watched “The Best Man,” a 1964 political film starring Henry Fonda and Cliff Robertson, with Lee Tracy, Edie Adams and Ann Southern. (I guess I haven’t yet had my fill of politics on MSNBC, CNN or PBS, and with the stock market having been so calm recently, there was absolutely no reason at all to watch CNBC.)

But, I digress… the movie plot revolves around a deadlocked Democratic convention, with Fonda and Robertson playing the role of the front runners vying to secure the nomination for President.

Fonda plays a thoughtful, ethical man, with a wry sense of humor and a strong sense of what he will, and will not, do to win the nomination. His flaw is that he seems indecisive.  Robertson, on the other hand, is a decisive, almost impulsive man, who is ruthless and who will do whatever it takes to win the nomination. Think of him as a cross between Richard Nixon and Joe McCarthy. (In the movie, Robertson became famous for his hearings on whether the Mafia was controlled by the Communists.)

So, we have one candidate with a conscience and another without; one, who was so convinced that he was in the right, that he was willing to smear his opponent. They are both seeking the endorsement of the ex-president, played convincingly by Lee Tracy, who won an Oscar for his portrayal. We see the machinations of the convention, the threats and deals.

Looking back to 1964, it’s amazing (given the era) that Tracy says that we’ve had a Catholic president, and some day we will have a Jewish President, a Negro President, and (to laughter) even a Lady President. Sounds funny now, but remember, this movie is 44 years old.

Originally, The Best Man was written as a Broadway play which opened in 1960. Both the Broadway play and screen play for the movie were written by Gore Vidal, who had the right balance of insider knowledge, cynicism and optimism.

As an aside, the story goes that Ronald Reagan was considered for a role, but studio executives decided Reagan “didn’t look presidential.”

The movie is well acted, engaging and entertaining. The entire cast was very good, but Fonda and Robertson were standouts. The Best Man is worth watching if you can catch it on TV, as it’s not yet available on DVD.

U.S. Government Fights Credit Crisis

“Desperate times call for desperate measures.” – Proverb.

This week has been among the most volatile on record for Wall Street and financial markets around the world. We came as close to a financial meltdown as I ever hope to see.

In today’s New York Times, the headline story, Vast Bailout by U.S. Proposed in Bid to Stem Financial Crisis described a “financial crisis that Fed and Treasury officials say is the worst they have ever seen.”

The Wall Street Journal said

“The federal government is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s, embracing the need for a comprehensive approach to the financial crisis after a series of ad hoc rescues.

At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, said people familiar with the matter, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, one person said.”

How did we get here?

A previous post discussed one factor, the lack of risk management at various investment banks. In addition, we had lurched from one ad hoc case-by-case “solution” to another – from Bear Stearn’s forced buyout a few months ago, to the U.S. government’s take over of Fannie Mae and Freddie Mac to Lehman’s bankruptcy.

One of the world’s largest insurance company, AIG, was the next corporate giant to run out of money or the time to raise it. The cumulative effect of all of these unfavorable events was just too much for people to handle rationally.

According to the New York Times, by Thursday September 18th there was so much panic that “the Federal Reserve poured almost $300 billion into global credit markets and barely put a dent in the level of alarm.”

Buried deep within the Times article is this very upsetting quote:

“None of those actions, however, brought much catharsis or relief, with banks around the world remaining too frightened to lend to each other, much less to their customers.”

Banks afraid of lending to each other! Now, that’s a panic to remember.

Money Market Funds

And there’s more. Investors were worried about the safety of the $3.4 trillion invested in Money Market Funds. So much so, that the Feds have stepped in to reassure investors that these instruments remain ultra safe. Who ever thought that such reassurance would be necessary? (This totally unexpected concern resulted from one Money Market Fund suffering losses due to holding Lehman Brothers commercial paper.)

Short Selling Ban

And, finally, according to CNN.com:

“The U.S. Securities and Exchange Commission took what it called ‘emergency action’ Friday and temporarily banned investors from short-selling 799 financial companies.

The temporary ban, aimed at helping restore falling stock prices that have shattered confidence in the financial markets, takes effect immediately.

“This will absolutely make a difference,” said Peter Cardillo, chief market economists at Avalon Partners. “Short sellers are going to have to cover their positions very heavily.”

Granted, banning short selling is a controversial policy. Whether it will have a long term effect remains to be seen.

Finally, a Comprehensive Plan

This certainly seems like a comprehensive approach to all of the fear that has been present. The Feds to the rescue! Confidence has been restored. Democrats and Republicans actually working together! Without a doubt, “desperate times call for desperate measures.”

Orthodox free-market conservatives might argue that the markets would have (eventually) sorted all this out without government intervention. I, however, don’t think so.

Conclusion

How this will all play out remains to be seen. We are certainly seeing one of the strongest stock market rallies ever. Will this continue? Have we seen the bottom? No one knows, but it is a strong possibility.

In any event, we continue to recommend well-diversified, properly structured portfolios and a long-term buy-and-hold philosophy. No one we know was smart enough to have bought at precisely 1 PM on Thursday, September 18, 2008, the exact bottom of the decline.

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