mschrenker | atGeist.com

The Lehman Issue in Layman Terms

On September 15, 2008, Lehman Brothers Holdings, Inc., announced that it intends to file a Chapter 11 bankruptcy petition. This filing will by far be one of the largest bankruptcies ever recorded. Over the weekend Lehman Brothers unsuccessfully attempted to regain control of their balance sheet by negotiating possible fire sales with several key banks.
This fallout is unprecedented but does not signal the end of our economy. Investment and regional banks that became intertwined with the subprime market have a tough road ahead and will have a difficult time surviving. Although painful to watch, this reconciliation is necessary for our country to financially right itself. Our government cannot continue to bail out banks that have been irresponsible in their lending. Doing so will only further derail our currency and contribute to higher inflation. Eventually, there has to be a level of accountability and I applaud the Federal Reserve Board’s Federal Open Market Committee for allowing this failure to occur. The American taxpayer should not be expected to bail out banks.

Some compare this extraordinary meltdown to the railroad collapse of the 1800s or the banking collapse of the 1930s that led us into the great depression. While there are some parallels, all of this is profoundly different and entirely manageable. We are not heading into another great depression.

Our economy is far stronger, wired, and better structured to handle this kind of event than we were in the 1930s. Although the FDIC keeps their list of troubled banks under lock and key, it’s estimated that there are only 120 banks in danger of folding. In all, 9,000 banks failed during the 1930s and depositors saw $140 billion disappear through those failures. In 2008, only 11 banks have been taken into receivership by the FDIC and losses have been minor. What many people don’t realize is that banks fail all the time and the FDIC can, at any time, step up in and restructure the bank and merge its assets into a soluble platform. For example, in 2002, 11 banks failed after the economy took a huge hit from 9-11. Source FDIC Our economy recovered and survived the financial storm. Lehman Brother’s bankruptcy was a necessary chapter in this period of resolution. It is time we clean our financial house and get back to a real economy of responsible lending and low-level consumer debt. Don’t let this steer you away from your long-term goals. Bank failures and market volatility can certainly contribute to financial anxiety. Yet, if you look at the big picture, this is only a blip on the screen, will have little impact on our lives, and months down the road will all but be forgotten.

The time has never been more right to start looking for value in a depressed market. Dollar cost averaging during corrective times in the stock market can lead to very positive results during market recoveries. Plant your seeds now.

Marc Schrenker is the Chief Portfolio Manager for Icon Wealth Management

Finding Sunshine in a Gloomy Market

Before I discuss what I believe to be positive market signs, I want to take you back to a very uncertain time in our country and economy: September 2001. Even before 9-11 occurred, the markets were in a steep decline as the technology bubble had popped, pulling the entire market down. 9-11 caused a further slide, depressing values even more. I ‘ve gone back and calculated a few “what-ifs.” If you had purchased $10,000 of Vanguard Index 500 Mutual fund on October 1, 2001, it would be worth $13,781 on June, 30 2008. Even if you’d purchased a very conservative mutual fund at one of the worst possible times in history, and realized the losses of the recent bear market you still would have profited.

Now, if you had waited a few more months after 9-11 and bought at what appeared to be the deepest, darkest hour, you would have profited far more. For example, if you had purchased $10,000 of Vanguard Index 500 on September 30, 2002, it would be worth $17,338 on June 30, 2008.

9-11 was a scary time for all of us. There was a great deal of uncertainty and it was unclear if life would ever be the same. Investors were frazzled and many threw in the towel. But the truth is we emerged a stronger country in many ways.

The fact is markets don’t grow in a linear method. Markets rock up and down yet over the long term, they appreciate nicely. While it is easy to focus on the near-term problems, it is equally important to focus on five- and ten-year goals. As tempting as it may seem, if you jump out of the market now, you might be incredibly disappointed in years to come. Opportunities abound.

This is the time when, as a portfolio manager, I get excited because I am setting up for long-term gains. Investing in uncertain times like these can be disconcerting. Yet as an experienced investor, I know there is no other way to get into a deeply discounted market.

The banking crisis, real estate meltdown, and shrinking dollar have made this a difficult market to navigate. Although deep storm clouds hover above, this doesn’t mean markets won’t recover; this is merely a temporary setback.

Things are starting to look better as energy and credit markets appear to be stabilizing. Some feel that there is no way our country can overcome such huge hurdles in this decade but I don’t see this as realistic. The United States of America is still the dominant market force, well-equipped to resolve today’s economic concerns.

If energy prices continue to retreat, it is my belief we are nearing the bottom of this correction. This is good news and those who exploit these rock-bottom values will be extremely pleased in years to come. Although there is no way to assure we are at the bottom of this market cycle, I believe a prudent strategy is to start dollar-cost-averaging into a high-beta portfolio. The reason we focus on a high-beta portfolio is because it gives it a “turbocharged” effect. If the market recovers 25%, a high-beta portfolio could out-appreciate the market.

While we’re not out of the woods yet, I see signs of life in our economy. If indeed this recovery has legs, it would be reasonable to expect positive performance out of equity portfolios in months to come. I know this will be a welcome sight.

Don’t let this bear market steer you away from your long-term goals. Corrections, market turbulence, and portfolio deviation is never a pleasant experience and it can be tempting to make hasty decisions in pivotal times like these. Patience, reasonable expectations, and careful planning are invaluable when weighing important financial decisions. Finding a way to thrive as you emerge from a bear market is when you get the highest value from your investments. And those can be sunny times, indeed.

Talk with your advisor today about the opportunities bear markets can offer you.

Marc Schrenker is the Chief Portfolio Manager for Icon Wealth Management, and ICON Company