There are few words which can adequately assuage the anxiety you must feel given the performance of the markets since mid‐September.  We are enduring a crisis of epic proportions, and the stock market has failed to respond to numerous and sizable emergency measures implemented by global policy makers.  It is most discouraging and indicative of those rare occurrences when markets crash out of fear and because of a lack of confidence and trust.

Following the 25% plunge in the Dow Jones Average in the Crash of 1987, the stock exchanges instituted “circuit breakers” which limit daily declines to a certain percentage.  Because of these “safeguards,” crashes, when they occur, now transpire over the course of weeks and months.  What has occurred since the collapses of Fannie Mae, Freddie Mac, Lehman Brothers, and AIG is, in effect, a market crash driven by systemic failures in the global financial system.  We emphasize that such events happen once in a generation, perhaps once in a century.

Legislators and certain regulators want to assign blame.  The origin of this crisis is simple:  excessive leverage.  Lending standards were dropped this decade because of greed and a naive assumption about asset values.  Much of the leverage in the system was hidden or embedded in derivative structures well beyond the purview of regulators and our outdated regulatory framework.  The market system is now unwinding a decade of this leverage, and that process will simply require more time and more governmental assistance.  The uncertainty among market participants, therefore, stems from a lack of transparency and adequate disclosure.  Restoration of trust in the markets will first require full and honest disclosure of financial conditions.   

Despite the heroic efforts of the Fed, Treasury and global central banks to date, our lending institutions continue to hoard cash.  The impact of this parsimony has been felt in short term funding needs of corporations and local governments as well as individuals seeking capital.  Until our banks resume “normal” lending activities, this crisis will persist.

Ironically, many stocks have fallen for reasons far removed from the credit crisis.  Both hedge and mutual funds have needed to raise substantial amounts of cash to satisfy redemption requests.  Hedge funds have also been subject to forced liquidations because of margin calls.  Such overwhelming technical selling pressure in certain sectors has created valuations we consider absolutely compelling from a long term investment perspective.  We intend to exercise caution with this market until uncertainty abates. However, we remind investors that the Crash of 1987 proved, in hindsight, to be the single best opportunity to invest in stocks during the 20th Century.