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| Greetings!
Thank you for interest in the Blue Haven Capital newsletter. We welcome your questions and comments and can be reached via email at info@bluehavencapital.com
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Question: What are the sizes of the following markets?
- The US Bond Market
- The US Stock Market
Which is larger? How much larger?
Click here for the answer!
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| THE MARKETS
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Stock index performance (Domestic and International)
Domestic Index Performance Year to Date (10/1/2008):
Dow Jones Industrial Average................-16.59%
Standard & Poor's 500..........................-19.29%
Russell 2000.......................................-10.38%
Domini 400 Social Index........................-16.75%
International Index Performance Year to Date:
MSCI Japan (in $US).............................-22.21%
MSCI Pacific xJapan (in $US).................-33.97%
MSCI Latin America (in $US).................. -27.59%
MSCI EAFE (World xUS in $US)..............-29.26%
Month End Interest Rates:
10 year US Treasuries...........................3.82%
10 year AAA rated municipal bonds..........4.15%
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| THE BOND MARKETS
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The Problem
Normally in periods of volatility the focus is upon the stock market. Lately of course, the focus has been upon the bond markets and the viability of some of the largest institutions in the world. Some of the very largest investment banks have gone out of business while others have either received government funding or received (and accepted) buy out or merger offers from stronger companies. Warren Buffet is now a roughly 10% owner in Goldman Sachs, having made a significant investment in that firm in mid September. Merrill Lynch is now part of Bank of America, Lehman Brothers and Washington Mutual are out of business, and Citigroup now owns Wachovia's banking business. Wachovia will be left with its retail brokerage firm, including AG Edwards, and Evergreen Asset Management.
The US Government is working on a $700bb liquidity package to acquire some of the untradable assets that the banks own, but as of this writing the banks are still loath to lend to each other. In fact, Bloomberg Television reported on the morning of September 29th that indicators showed banks are less willing to lend to each other than ever before. Evidence shows that not only is it difficult or impossible for many banks to find liquidity, but that the liquidity the banks do have is not being offered to other banks. For a healthy and efficient credit market to exist, banks must be willing and able to lend to each other so that credit is liquid and accessible for those wanting to lend to businesses and individuals.
Right now, with asset values falling, banks have less required capital. As they become undercapitalized, they face runs on their money, which exacerbates the capitalization ratio problems and they spiral down. The US Government will buy some of these illiquid assets, hoping to stem the spiral, but there is no guarantee that lending will increase. The hoped for solution is to increase liquidity and therefore increase lending...but the government can really only help the liquidity issue. The lending is up to individuals and businesses, which seem unlikely to borrow in the current economic environment.
If the $700bb liquidity package passes (as of this writing, it had not), then perhaps consumer confidence will start to increase, and the economy will begin its hoped for recovery.
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THE BOND MARKETS
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Solutions
We have heard many questions about what to do in these markets. Here are some of recent questions and answers. Is my money market account safe?Money market accounts are a type of short term mutual fund holding various securities. Our recommendation (and, what we did for most clients 2 weeks ago) is to make sure your money market account is one which holds only US Treasuries. For those in higher tax brackets who are used to being in tax free money market funds, our recommendation is the same: For at least the next few months, give up the tax advantage of a municipal bond money market fund and take advantage of the security of a money market account consisting only of US Treasuries. Yes, the US Government is offering a guarantee on money market accounts for a year, but that guarantee is only good on balances as of September 19th. For those who receive this and are not clients of Blue Haven Capital, call your current money manager and discuss the safety of your money market account with him or her. Again, the slight inconvenience of a phone call and allocation change is probably worth the extra piece of mind. I need interest income. Are there safe bonds out there?Yes, there are. US Treasuries are still considered the safest bonds in the world. Also, escrowed and prerefunded municipal bonds that are backed by US Treasuries are being offered cheaper than ever in history. In fact, municipal bonds escrowed in US Treasuries are currently offered at higher yields than US Treasuries themselves. Another alternative is the somewhat unknown "taxable municipal" bond. Ocassionally there are even prerefunded or escrowed taxable municipal bonds in the market. As always, unless it is US Treasuries, it is safest to keep each bond position at no more than 5% of your overall portfolio, regardless of the issuer. I have my business checking all tied up in one bank.The FDIC insures most bank accounts up to $100,000, and has a few exceptions and fine print on that insurance. However, if a bank does go out of business, it may take several weeks for the FDIC to pay out the money you have. The safest bet may be to split your accounts between two different local banks for the time being. Again, it is inconvenient, but when you need to pay vendors and make payroll, you don't want to have to wait two weeks for your money. I am not sure my other money managers really understand bonds.Historically, bonds do not grab the attention or academic interest of many investment managers. For those who are not clients of Blue Haven Capital, we encourage you to ask the questions you have of your current investment managers. If you are dissatisfied with the answers, or want a second opinion, we would welcome that opportunity to speak with you. Our firm has an extensive institutional level bond background and is working hard to stay ahead of the current problems. |
| LUNCHEON AT NICHE
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Luncheon For Nonprofit Executives and Board Members
Cal Stoney, a partner with the firm Gonser Gerber Tinker Stuhr spoke at our September luncheon titled "Raising Funds in Challenging Times" Cal's timely presentation focused on strategies and tactics for raising philanthropic dollars during uncertain economic times.
Attendees included private grant making organizations, civic group members, and public charity board staff and board members. Cal gave examples from his 30+ years of fundraising experience and helped lead an enlightening conversation regarding what nonprofit groups might be doing during these troubling financial times to help maintain both awareness and funding.
As usual, the food at Niche Restaurant was excellent, and many stayed afterwards to further discuss Cal's ideas and to network with peers in the industry.
Our next luncheon will be held Friday, December 5th. Visiting from New York will be Doug Bauer of Rockefeller Philanthropy Advisors. Doug recently spoke at the Association of Small Foundations' National conference in Colorado, and was interviewed for an article (along with Blue Haven Capital) in Advancing Philanthropy Magazine. The article can be found in pdf here.
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Blue Haven Capital is a fee-only registered investment advisor providing experienced, professional low cost investment management for individuals, private foundations, and public charities. If you know an individual or group who might be interested in our services, please forward this email to them!
Best Regards,
Donald Cummings Bill Moucka
Principal Principal
Blue Haven Capital LLC
630.588.3800
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