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| These Are Interesting Times |
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by Bob Van Wetter
The third quarter was remarkable in that the financial train wreck that started out as the subprime mortgage problem - a year ago - picked up speed and began to threaten the faith that the world has long held in the stability and strength of the U.S. financial system. The Federal Reserve and U.S. Treasury have taken extraordinary measures to restore that faith and provide an all-important backstop for banks that hold what appear to be untold billions in what are now considered toxic assets. What has accompanied this widespread meltdown of asset values is significant deleveraging of U.S. and global financial institutions. Actions taken by the Fed and Treasury will help to bridge the gap between the economy's overleveraged state and its de-leveraged final destination. Not surprisingly, credit growth at the consumer level will slow as everyone adjusts to the new and more austere economic reality. This in turn will result in significantly less discretionary consumption at every level - fewer miles driven, meals eaten out and shopping sprees at the mall.
The reality of this slowdown has taken a toll on stock prices across the board. The lack of confidence in a happy ending for this crisis is weighing heavily on all investors. At times such as these it is helpful to revisit the premises for investing in stocks. In light of recent declines and assuming we are not going out of business as a civilization, there are many positives that will eventually be realized as a result of this crisis. Namely:
1. Stock valuations are attractive across all asset classes, specifically in the U.S. and emerging markets. The forward PE ratio of the S&P 500 is just under 12x earnings. The 40 year average is 18x.[1]
2. Housing affordability is back at levels that existed in the early 1990s.[2]
3. Corporate balance sheets are much healthier than in previous downturns. The Federal Reserve reported that at the end of the second quarter corporations were holding $14 trillion in cash and cash equivalents.[3]
4. The global pool of capital continues to be quite strong. As banks and individuals pay down debt, the savings rate increases - this is something that the U.S. consumer has not experienced for many years. This will add to the amount of money available for investment.
5. In the last several weeks, famed value investor Warren Buffett has made several high profile investments in US companies. Mr. Buffett is famous for having a keen sense for value.
Northstar client portfolios are well diversified and own stocks in quality companies - many pay generous dividends that have grown consistently for many years. This combination of attributes has in the past provided the basis for sound investing and we expect it to be so in the future. You can look with confidence to Northstar as we work hard to navigate these uncharted waters.
[1] Bloomberg 10/08
[2] Wells Fargo and CO analysis 10/08
[3] Federal Reserve Board informational website
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| LIfe-Blood of Economy at Risk |
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by Tim Waymire
"Unprecedented". This adjective was used an unprecedented number of times over the past three months. Another phrase that got a pretty good workout was "credit crunch". The bond markets have essentially ceased to function in a normal fashion. Credit has been described as the life-blood of the economy. Corporations need it to fund general corporate purposes, small business owners need it for payroll and inventory, consumers need it to purchase a car or a house, and even banks need it in order to fund loans to corporations, small business owners, and consumers. As you can see, there is a real connectedness in the credit markets. Inherent in a normally functioning credit market is confidence in your counterparty. In the present environment, that confidence is just not there.
As a result, those who can lend are limiting their funding to what they perceive to be a riskless counterparty, the US government. This has resulted in very low yields on US Treasury obligations. On the other hand, those who need funding, in many cases are not able to get it in this current environment. This, of course, is a very simplistic description of some of the issues currently facing the bond markets today. However, and continuing the life-blood analogy, the circulation of credit is not flowing smoothly and that has negative ramifications.
The genesis of the current predicament may be traced to the dramatic increase in subprime loans that were made over the past several years to mostly unqualified borrowers for the purchase of homes. As home values have begun to decline, and adjustable rate mortgages have adjusted upward, these borrowers have been defaulting in growing numbers. While this stress in this isolated sector of the credit market is certainly bad enough, it alone would not account for the credit crunch we are now experiencing. The problem is that these subprime mortgages were subsequently securitized, sometimes insured, and then sold to a variety of investors as mortgage-backed securities. These securities now constitute the illiquid and difficult to value assets weighing down financial company balance sheets. It is also precisely these assets that are the target of the $700 billion relief package recently passed by Congress. While not everyone agrees with every aspect of this legislation, most do believe this represents a significant step forward in the healing of our credit crunch. In essence, the patient will be receiving a blood transfusion to allow the circulation to return to normal. We are optimistic that this relief and other actions being taken by the US Treasury, the Federal Reserve, and the FDIC will help restore much-needed confidence in the markets during this difficult period.
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| A Retirement Income Checkup |
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By Charlie Farrell
In light of the current market developments, we wanted to review the basic risk management strategies incorporated into our portfolios for retired clients.
While one can never predict market returns, we know from studying history that the financial markets have experienced many extreme highs and lows over the last 100 years. Thus, when designing the investment allocation for retirees, we consider the possibility that clients may encounter a period of severe economic turmoil.
Consequently, our portfolios are designed to help clients get through these difficult cycles, while still making distributions to meet their basic living expenses.
For retirees, we focus on four fundamental aspects of prudent portfolio management: Balance, Diversification, Cash Reserves and Cash Flow.
Balance. Our retirement income portfolios are balanced between bonds and stocks. In general, the bonds provide a greater degree of principal stability for the short term and the stocks provide an opportunity for growth over the long term.
Diversification. The bond and stock holdings are diversified among various market sectors. This helps ensure that portfolios are not subject to significant declines from any one particular sector of the economy.
Cash Reserve. We generally maintain approximately 6 to 12 months' worth of distributions in cash. This provides us with a ready source of funds to meet the client's monthly or annual distribution needs.
Cash Flow. By using a balanced investment strategy, the portfolios generally receive a steady stream of bond interest and stock dividend payments throughout the year. These payments are called the cash flow. Thus, we have a constant flow of money into the portfolios that helps us maintain a consistent stream of distributions to our clients. Moreover, the cash flow provides us with greater flexibility to weather market volatility and wait for security values to recover.
In summary, the combination of balance, diversification, cash reserves and cash flow creates the foundation for a more secure retirement.
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Please be sure to visit our website at www.northstarinvest.com for links to Northstar in the news. For reprints of the articles referenced, please call or send us an email at Northstar@northstarinvest.com Our team has been working hard to add to the ways that we can help you achieve your financial planning and investment objectives. |
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Northstar Investment Advisors, LLC
303-832-2300
800-204-6199
fax - 303-832-0034
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 Shown left to right; Moses Taylor, Dick Kopp, Fred Taylor, Tim Waymire, Bob Van Wetter, and, Charlie Farrell |
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