The Question Of The Hour 041009

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Is this current stock market rally the real thing?

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The Question Of The Hour 041009

  1. 1. To Our Clients and Friends, It is Friday (at last!), and the Dow Jones Industrial Average has decisively broken 8000 again, ending the week at 8083. Does this week’s rally signal the end of the bear market and the beginning of a real recovery? Should we be considering a reentry into the equities market so as not to miss the familiar “V” that has followed every bear market in recent memory? That is the “Question of the Hour” – the question not only you, our clients and friends, have been asking us, but the question we are constantly mulling over ourselves whenever the market rallies. As we have explained and emphasized consistently, Silver Oak’s ship is always anchored to its internal “navigation system” – a set of principals which guide us in arriving at every investment policy decision. Its essence is that it is most important to us to be able to understand the underlying causes and rationale for what is occurring, rather than simply observing the phenomenon itself. We have, on many occasions, attached articles and commentary for your information by economists and independent thinkers with whom our thinking resonates. One such example is a recent simple statement by Barton Biggs, former chief global strategist at Morgan Stanley: “I am a child of the bull market.” He elaborated by noting that he has always bought on dips on the expectation that stocks would always move higher. Bill Gross, Co-CEO of PIMCO, commented in his recent commentary that we are all children of the bull market (it is all most of us have ever known until now); “ but one fostered by leverage, deregulation and globalization that proved unsustainable in its excesses.” We can readily observe each of those factors is operating in full reverse now…not a fertile basis for a sustainable, historic bull market in stocks. (Yes, globalization is actually contracting as country after country is in greater need of deploying its resources at home than of investing them abroad. It seems that the main thing being exported these days is debt!) Among others, we are struck by a recent commentary by Simon Johnson, professor at the M.I.T. Sloan School of Management and co-founder of the global crisis Web site www.BaselineScenario.com. (You may go to the site, or to the NY Times site Room For Debate – “Bear Market Rally: What Does it Mean” http://roomfordebate.blogs.nytimes.com/2009/04/10/bear-market-rally-what-does- it-mean/?hp for the full article and more commentary.) 1
  2. 2. “Some stock market rallies are reassuring. Others provide at least temporary respite. And a third kind, more commonly seen in emerging markets, actually expose deeper underlying problems and contribute to a further downturn… We seem to be experiencing this third kind of rally in the U.S. right now. Equity prices are up sharply, but the debt market continues to indicate a high probability of default… The equity market rally, paradoxically, creates conditions in which the government can consider letting a major bank default. Of course, this situation arises also because the administration is low on bailout money, and Congress has lost patience with all the “rescue” efforts since September and is not inclined to provide more.” ~Simon Johnson (4/10/09) On balance, we do not believe that the thesis that “the stock market is a leading indicator and therefore it must be telling us something” is enough to hang our hat, or your money, on. We do believe that this rally was instigated by some surprisingly good news from banks (underlying source of those operating earnings unsubstantiated, though), and the G-20 Conference in London where global leaders reached consensus on addressing the crisis with fiscal stimulus and financial regulation. These two factors, as Nicholas Bloom (economics professor at Stanford University and an associate at the Centre for Economic Performance, London School of Economics) pointed out, have helped reduce uncertainty. And so far, nothing has disturbed that euphoric feeling of greater certainty that investors and markets seem to cherish. We believe that we now live in an uncertain world, and that certainty will not rise to the level of real confidence until the systemic fundamentals dictate it. We will therefore stick to the fundamentals that we observe, and try, with an unjaundiced eye, to allow our independence and objectivity always guide our research and the investment policy decisions that directly affect your financial well being and peace of mind. And, as always, if you have any questions at all concerning this letter, please do not hesitate to call us. Best personal regards, Eric & Joel Eric D. Bruck, CFP® Principal Silver Oak Wealth Advisors, LLC 12121 Wilshire Blvd., Suite 1300 Los Angeles, CA 90025 Tel. (310) 207-4800 Cell (310) 890-2610 2
  3. 3. Fax (310) 943-0398 Reply to: ebruck@silveroakwa.com Website: www.silveroakwa.com 3

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