Hang in There

10/09/2008 10:00 am EST

Focus: REITS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says this crisis is very bad, but the markets will come back-as they always do.

The credit crisis has been simmering for over a year, and it boiled over in September as major financial firms collapsed and others teetered, facing increased difficulty obtaining credit. Lending between banks ground to a halt, and corporate borrowing costs soared.

As fear gripped financial markets, global stock markets sank. The Standard & Poor's 500 index dropped nearly 9% for the month, only slightly less for the quarter and is now down 24% from a year ago. The Dow Jones Industrial Average held up better, down 6% for the month, 4% for the quarter, and 22% for the 12 months.

The Russell 2000 index of small-caps lost 8% in volatile September but held up best for the quarter with a loss of only 1.5% and 16% from a year ago. Established foreign markets as represented by the EAFE Index lost 15% last month and 33% for the 12-month period. Emerging markets as a group are down about the same.

Lehman Brothers' bankruptcy forced one of the oldest money market funds to "break the buck" and fears spread, sparking a flight to the quality of short-term treasuries that drove bill yields down to near zero.

In response, the US government stepped in, taking unprecedented actions. To stop the liquidation of money funds, the Treasury set up a temporary insurance program, and the Federal Reserve allowed banks to borrow to finance the purchase of asset-backed commercial paper from money funds. The Securities and Exchange Commission halted shorting of the securities of many financial institutions.

The Economic Stabilization Act authorizes the Treasury to buy $700 billion of troubled assets from financial companies and create a market for these illiquid securities where a market had ceased to exist. They would likely buy these difficult-to-value securities at deep discounts.

We expect a rescue plan to ease the crisis and open the lending spigot. As we head into the final quarter of the year with the stock market solidly in bear territory, fear and uncertainty prevail. While we can't know whether the stock market has hit bottom or not, we know that market bottoms generally accompany dire news. And although the news is dire, we caution against thinking that this time is different or worse than other times.

As leadership turned to US equities earlier in the year, our initial domestic investments were broad-based. Now we are prompted to favor value strategies and companies that either pay outsized dividends or are in industries that are historically consistent with positive cash flow. Current leadership favors companies that either trade at very cheap valuations or are less likely to need to borrow money to fund their business models.

Although losses of 20+% can be frightening, they are not unprecedented. Markets have fallen this far before, and it and will happen again. We've ridden through severe downtrends before and are confident that this, too, shall pass.

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