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Trust Department Quarterly Newsletter 4th Quarter 2008
Bailout or Investment? Starting in March 2008 our government, through the Federal Reserve, stepped up to assist in the buy out of troubled Bear Stearns by providing up to 29 billion dollars in loans. Since then the government has continued to make available, to mostly the financial markets, unfathomable funds to shore up areas of the market that have become illiquid. More recently, the automobile makers were on Capital Hill pleading their problems that are only in part due to the poor economy. Government programs to date have included tax incentives for first time home buyers; a bill to allow up to 400,000 homeowners to refinance existing mortgages; the partial takeover of Fannie Mae and Freddie Mac; a stimulation plan of 700 billion dollars to infuse capital back into our banking systems; buyer of last resort packages for commercial paper; some backing of selected corporate bonds; and most recently the loans to the automobile makers. These programs have been named bailouts or rescue packages. What we hope they are is investments into our American economic way of life. As these programs are being structured the Government will either break even or make a profit if the receiving entities recover. These “investments” or guaranteed programs when totaled amount to over 5.6 trillion dollars. That is about the same amount our U.S. equity market declined in 2008. The new administration in Washington is promoting a further stimulation package, which is projected to cost anywhere between 800 billion and a trillion dollars. Barrack Obama is hoping to have this bill ready to introduce when he enters the White House so it can be passed in late January. The stimulus package is proposed to include modest income tax breaks. The majority of the stimulus package will be targeted towards building and rebuilding infrastructure and the creation of jobs quickly. It is going to take some time for our economy to turn around, but many economists are predicting the economy will look better in the last half of 2009. The Stock Market Instead of having a recovery in the stock markets in the last quarter of the year, as has been the case in the last few years, the S & P 500 lost about the same amount as it had lost in the first three quarters of the year. The S & P ended the year down 39.49%. In spite of oil prices coming down and food prices stabilizing investors’ confidence in stocks has not returned. We feel the bottom of the market has been reached. Barring any unforeseen calamity, the equity market should show some recovery in 2009. We as a society have come to expect the government to turn the economy around quickly. The economy does not work that way. On the bright side and if history repeats itself 2009 will show a recovery. In each of the nine bear markets that have occurred in the last 50 years the stock market has experienced a double digit return in the 1-year period following the low point in the cycle. The best of these recoveries was a 58% return and the worst was a 23% return. The Bond Market Interest rates took a significant drop during the last quarter. This drop is due to a number of reasons. The Federal Reserve continued to reduce interest rates to the point where the current rate on fed funds is ¼ of 1%. All the money that has come out of the stock market has provided a large supply of monies for the bond market, which drives down interest rates. We would anticipate that interest rates will remain low as the Federal Reserve works to keep our economy stimulated. We would not anticipate an increase in interest rates for the first half of 2009. However, these low rates will not last. It has been possible for individuals with good credit ratings and loan to values to refinance houses at below 5% within the last 30 days. Thought For the Day Tough times don’t last; tough people do, remember? - Gregory Peck |
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