Category: Research Notes

With the debt ceiling decision temporarily resolved, financial markets have quickly turned their attention to the more immediate concerns about the health of the global economy. The major stock indices had already slumped during the debate leading up to the contentious vote, and the declines have only steepened since–for a total decline of nearly 9% since July 22nd. U.S. Treasury yields—amazingly—are striking new record lows. Given the ominous headlines, investors are understandably concerned about the potential for a prolonged slide.

Like the rest of the world, we are watching the tragic events in Japan intently, with great sympathy for a nation that has seen more than its share of disasters over the years. Events are unfolding rapidly, with the biggest and most volatile source of fear being the release of radiation from the crippled Fukushima Daiichi nuclear plant.

Obviously, the nature of an investment in BP has changed dramatically in light of the enormity of the calamitous oil spill in the Gulf. Portfolios in which BP was originally held as a high-quality, defensive position might now consider realizing losses and reinvesting in any of our other attractive energy sector ideas – most of them also oversold given the recent strength in the dollar and attendant weakness in the commodities, as well as over concern about collateral regulatory and political fallout in reaction to developments in the BP disaster.

As the stock market continues its rapid decline from the recent highs of mid April, spurred by fears over a Euro contagion and the potential effects on our nascent economic recovery, we thought it appropriate to reiterate our positive view of high quality US stocks.

The financial crisis and economic recession have placed severe strains on state and municipal budgets, with a double whammy of declining tax revenues and increased demands on “safety net” services. Should municipal bond investors be concerned about defaults or liquidity risks? In particular (for our clients who are Maine residents), what are the impacts and risks in the local municipal market? Finally, have these concerns created a buying opportunity for taxable investors?

In the wake of continuing signs of global economic deterioration, together with the realization that bank rescue and stimulus plans coming from Washington will take time to yield tangible results, the major indices are revisiting the lows of last November.

For the second time this week, we find ourselves responding to some extraordinary developments in the financial markets. It is clear to us that this week’s action was not about earnings, dividends, oil prices, bad management, mismanagement, or even GDP. There is nothing efficient in the way this market is operating, either in terms of pricing or the very market mechanism itself.

Although Kipling’s most famous verse may seem too obvious in this context, we can’t think of a better time to invoke it. As we go to press, the Dow is down another six percent today, adding more pain to the 22% decline already for the year. The advance/decline ratio is an unheard of 1:30, and the VIX (volatility index) is at a record 57. To call what we are witnessing today anything other than panic selling would be bordering on delusional.

These are historic times, though painful and unsettling. Taken together, Lehman’s bankruptcy announcement, news of Bank of America’s acquisition of Merrill Lynch, Treasury Secretary Paulson’s stated refusal to bail out American International Group and the stock market’s 4.7% decline will place yesterday among the most remarkable and memorable days in modern market history – if not the entire history of our markets.

Energy market sentiment is extremely positive, posing the possibility that prices, especially in the futures market, could fall precipitously if energy fundamentals prove not to be as compelling as the market expects – triggering a flood of new near-term supply currently held in storage awaiting higher prices.