" History has shown economic cycles of boom and bust (recession)
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" History has shown economic cycles of boom and bust (recession)

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" History has shown economic cycles of boom and bust (recession) " History has shown economic cycles of boom and bust (recession) Document Transcript

  • Special Stock Market Update for Concerned Investors Robert Boshnack, Chairman Vision Financial Markets LLC March 17, 2008 We believe the problem facing the stock market in these troubling times cannot be attributed, as some would argue, to current interest rate levels so much as to a lack of confidence in the financial system itself! Rate cuts are ongoing and, as such, have been spurring sharp declines in the dollar. This, in turn, is steadily ballooning raw materials and food prices—oil, gold, and the grain complex, to name a few—to record levels. Rate cuts are not going to help lenders trust each other and lend more; instead rate cuts may throw accelerant on a heated inflationary environment. Unfortunately, business failures and other economic pain likely to accompany a recession are a necessary evil for the economy and Wall Street going forward. Yet, we remain steadfastly optimistic that the recession now upon us won’t be nearly as severe as some might have it! We strongly suggested in our January 5, 2008 special stock market report, Stock Market Analysis and Predictions, that a recession was all but unavoidable. Excerpts from these comments may be viewed below. The report, in its entirety, may be accessed at: http://cta.visionlp.com/pdf/gen/2008_smr.pdf Economic Cycles: History Does Repeat* “ History has shown economic cycles of boom and bust (recession) are unavoidable… Periods of boom ending with periods of bust are integral components of any and every economic cycle. While the bust cycle may be temporarily avoided by interest rate manipulation, in the long run the manipulation tends to make matters worse… No matter how much intervention comes into play to prevent the consequences of rampant speculation a cleansing process (recession)
  • eventually occurs… We believe the “cleansing process” is in its initial stages and may last for several years. We remain committed to the long-term economic and stock market forecasts contained in our July 30, 2007 Special Report and in our last stock market report, from August 30, 2007 Comments on Fed Rate Cuts and Investment Advice. Although our last report was written following the Fed’s first discount rate cut in August 2007, we believe our comments remain apropos for any rate cuts the Fed likely will make in 2008! In the Report, we said: We believe the Fed’s action by no means ensures that the market decline (or bear market) is over. And it certainly hasn’t eliminated market risk. But it has likely slowed the descent and provided time for the markets to calm down and consolidate. Unfortunately, we also believe the die has been cast: the bubbles in real-estate, mortgage-backed securities, and the credit markets (those we have repeatedly forewarned investors about in our stock market reports) are simultaneously deflating. We believe an economic slowdown and quite possibly a recession is in store in 2008, as the contagion from these deflating bubbles has and will continue to affect most parts of the economy and the consumer. *Excerpts taken from our January 5, 2008 stock market report. ” 2008 Market Forecast* “ In our 2008 Market Forecast, we said: Although we are not officially in a bear market (as defined by a 20% drop from the highs) we believe history will prove one developed in the first half of 2008. We continue to believe that the contagion from the real estate and mortgage- backed securities markets will spread to the rest of the economy, faster than most anticipate, depressing the market more and more as events unfold. Nonetheless, we believe we’ll see sharp market rallies as investors are convinced by Wall Street that each problem in the real estate and mortgage- backed security markets is contained by some form of intervention by the Federal Reserve or government.
  • We acknowledge that such interventions can support the markets in the short term. However, as new problems appear, the market will make new lows until a bottom is finally reached. Unfortunately, this will be a protracted process that should last through 2008 and beyond. Trillions of dollars in toxic illiquid securities will take many years to unwind! It will also take years to work off the ever building record inventory of homes. In fact, it commonly takes three to four years (or more) to work off the current level of excess home inventories, which we expect will increase still further in 2008! Milton Freidman, a noted economist once said that stock prices are rational in the long-term, but in the short-term, they’re far from rational; they’re full of noise. We look for this “noise” to come in the form of rallies, some of which may prove quite strong. These rallies will persuade investors that the market has bottomed only to find that the bottom is simply a correction in a bear market! *Excerpts taken from our January 5, 2008 stock market report. ” Most Disturbing Aspect of Credit Crisis In our July 30, 2007 stock market report, Stock Market Analysis and Predictions for the Balance of 2007, we predicted the following: “ In our opinion, the most disturbing aspect of all this is the crisis in the real estate and mortgage-backed securities markets are just starting and will take years to unwind. The contagion from sub- prime lenders is already affecting higher quality borrowers, with ominous implications for lenders of every kind, including those leveraged buyouts. The easy money that has propelled the stock market and economy is drying up and with it a bear market in stocks is on the horizon. The era of higher risk with increasing volatility and decreasing profit potential in the stock market is here! The real risk is not what we know about the problems in real estate and mortgage- backed securities, but what we don’t know! We believe the continued deterioration in these markets will prove a drag on economic growth and have a greater spillover effect onto broad consumer spending—ultimately depressing the market further as events unfold. Nonetheless, we believe we’ll see sharp market rallies as investors are convinced by Wall Street that each problem in the real estate and mortgage- backed security markets is contained. But, as new problems appear, the market will make new lows until a bottom is finally reached. ” View slide
  • Back to the Present The most disturbing aspect of our forecast above is that we appear to be at the beginning of the real-estate and mortgage backed security crisis and its “contagion” would spread to “lenders of every kind.” Indeed, the contagion has, to date, spread not just to the mortgage market; it has metastasized to commercial mortgages, (relatively safe) municipal bonds, credit card debt, student loans and a host of other areas down the credit food chain. We remain firm in our belief that it will take quite some time to unwind the multi-trillion dollar “mess” in mortgage- backed securities and that it will be a drag on the economy and stock market for years to come! …and the Good News! Yes, the economic climate is looking bleak and a recession seems almost inevitable. However, despair among investors ought to be tempered by what we believe will not amount to a severe recession or depression as some analysts are predicting. We view the stock market trending lower, albeit with sharp rallies along the way, but we certainly do not anticipate any type of crash! And while we disagree with the Federal Reserve’s excessive reduction in rates, intended to stem the crisis in the financial markets, we do agree with their strategy to take $200 billion AAA rated mortgage paper and swap it for T-bills. They may begin with $200 billion, but we strongly sense the number will increase perhaps several-fold until the crisis is finally brought under control! If the major banks were compelled to write down the potential losses on their AAA paper and other similar assets, it could have ultimately taken down the U.S. banking system. The Fed’s actions were not meant to save the banks, but rather the economy! Strong support for our belief that the Fed will do anything in its power to restore confidence in our financial system and stem the credit crisis can be seen in their actions after Bear Sterns was bought by JP Morgan Chase. The Fed created a special lending facility that will supply short term loans to big banks. We believe this facility will be operational as long as is needed to provide liquidity to the credit markets and end the credit crisis! Our opinion is supported by the following excerpts from a March 16, CNN article entitled, Sunday Surprise: Fed Steps into Credit Crisis: “ The central bank approved a cut in its lending rate to financial institutions to 3.25% from 3.50%, effective immediately, and created another lending facility for big investment banks to secure short- term loans…"These steps will provide financial institutions with greater assurance of access to funds," Federal Reserve Chairman Ben Bernake View slide
  • told reporters in a brief conference call Sunday evening…The new lending facility - described as a cousin to the Fed's emergency lending "discount window" for banks - is geared to give investment houses a source of short-term cash on a regular basis - if they need it…It will be in place for at least six months and "may be extended as conditions warrant," the Fed said…" It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown. ” According to John Mauldin, editor of Investors Insight, this action is similar to that taken by bank regulators in 1980 in the midst of the Latin American Debt crisis. At the time, many major banks registered losses greater than their capital on Latin American loans which had defaulted. The Fed permitted the banks to carry these worthless loans on their books at full face value. It took six years before they started to actually write them down. Without that measure, however, many major U.S. banks would have gone bankrupt. The Fed’s action simply bought the banks time to improve liquidity….as we believe will be the case now with the Fed’s measures to deal with the current credit crisis! It’s no secret: The Fed and other central banks know we are in a banking crisis. We believe they will do whatever they deem necessary to prevent major bank failures – and a potential meltdown in the U.S. and world’s banking systems. Whether these actions result in the facilitation of either mergers or full- or partial buyouts among financial institutions, the process won’t be easy and there will probably be a number of casualties among smaller banks along the way. And expect some measure of collateral damage to impact the economy to varying degrees. But we will get through this as we have all other economic crises! Conclusions to be Drawn… Economic downturns are unavoidable. This one is no different! It will probably take years to unwind the multi-trillion dollar “fiasco” in mortgage-backed securities. As the process unfolds, it will prove to be a drag on the economy and stock market, we believe, for years to come. However, while there is some “gloom” out there—make no mistake about it—there is, we strongly believe, no evidence for “doom.” At times like these—and there is ample precedent for it— the naysayers seem to come out of the woodwork en masse. We advise investors to pay them no heed. Like any storm, this too shall pass and the sun will come out: Patience is the key word! We continue to offer our valued investors the same investment advice we provided in our January 5, 2008 stock market report: “ Investment Advice We believe that any prudent investor should ask himself the following: "Is my portfolio diversified with investments that are
  • non-correlated with stocks, and does it possess the potential to perform well in bear, bull and even sideways markets? We believe that there is increasing risk, decreasing profit potential and too much uncertainty and danger in the market to be complacent. We are all faced with a combination of fundamental factors that could trigger a recession and substantial declines in stocks: the real estate and mortgage-backed securities markets are deteriorating with no end in sight; corporate earnings are declining; a credit crunch is immersing a wide swath of the economy; inflationary signals are starting to flash red; oil has surged to record highs; other commodities like grains and gold have reach price levels not seen in decades; and the ability of consumers to support the economy is highly in doubt. We believe investors can little afford to risk getting caught in a new market top, thereby putting themselves in position to watch most if not all their hard won profits over the past few years go down the drain! Given all the signs pointing to an economic downturn or recession, we believe it’s a matter of financial priority for prudent investors to maintain their objectivity in regard to the dangers facing the economy and the stock market. It is important that each investor attempt to protect his or her portfolio from sharp declines in stocks by diversifying into non- correlated assets including commodities. Investors should be aware that the risks associated with trading futures and options are significantly different than those of stock investing, investors may lose more than their initial investment. While we advocate diversification, be advised that it won’t necessarily provide protection against substantial loss. We believe the commodities markets, underpinned by strong fundamentals of supply and demand, are still in the relatively early stages of a bull market. The commodity markets as measured by the Goldman Sachs Commodity Index (GSCI) tell the “story.” From the end of 1998 to the end of 2007 the GSCI rose 359% (133 to 610). Over the exact same time period the benchmark S&P 500 index rose 19% (1229 to 1468). The bull market in commodities, which began in 1999, kept up its strong pace in 2007 and we believe may continue upward for years to come. The stock market, on the other hand, finds itself in the early stages of a bear market, supported by weak fundamentals. Accordingly, we feel suitable investors would be advised to diversify their portfolios with alternative investment vehicles,
  • such as commodities that have a virtual zero correlation with stocks. Investors should be aware that past performance is not indicative of future results. Futures and options involve substantial risk of loss and are not suitable for all investors. For a better understanding of the bull market in commodities, read our Special Report, Commodities are the Place to Be! The report may be found at: http://cta.visionlp.com/pdf/gen/Commodities_are_the_place_to_ be.pdf The one thing we believe we can forecast with certainty is that there will be uncertainty and extreme volatility in the stock market for quite some time to come. With ever increasing risk and decreasing profit potential, we are of the opinion that this is the worst stock market environment since the top of the market in 2000! For suitable investors Vision Financial Markets LLC recommends several professional Commodity Trading Advisors (CTAs) whose trading approach is to generally wait for a stock market correction and then write (sell) far out-of-the-money puts. Their goal is to potentially capitalize on the higher premiums available in today’s volatile markets. These options are generally written far enough away from the market so that the CTA attempts to optimize a high probability of success. Skilled option sellers can often sell these options far enough out of the money so that they may have a higher probability of expiring worthless, with investors thereby able to collect the richer premiums offered in volatile market environments. Investors should be aware that substantial risk of loss exists in futures and options trading no matter who is managing your money, and that the risk of loss in selling options is unlimited. For example, if the Dow has dropped 6% over the past week, we believe that the likelihood of a drop of that magnitude over the next several weeks is highly unlikely. As such, it is our opinion that a CTA who utilizes a strategy for put options, such as the one mentioned above, could have the potential to benefit from these markets. . We believe this trading approach is one way to potentially capitalize on a lackluster or bear market in stocks. Please be advised that the risk of loss in option writing programs is unlimited, that this investment is not suitable for all investors, and that the risk of substantial loss exists in futures and options trading no matter who
  • is managing your money. Ask your Vision introducing broker for disclosure documents on our S&P option writing traders. Read their disclosure documents; carefully scrutinize each advisor’s performance record, fees, risks and other important information before you invest. Note: Disclosure documents are also available for professionally managed ” CTA accounts trading in liquid commodity markets like gold, oil, grains, livestock, etc. ************************************************************************************************************* This piece has been prepared by Vision Financial Markets, LLC, a registered futures commission merchant. Futures traders should be aware that daily market volatility might cause loss despite prevailing trends in the stock market. The risks associated with trading futures and options are significantly different than those of stock investing, investors may lose more than their initial investment. While we advocate diversification, be advised that it won’t necessarily provide protection against substantial loss.   2008‐CINV‐00664