Not since the reign of FDR have we witnessed as much government and regulatory involvement in the financial markets of our country. Although not written in the Constitution, traditional capitalism no doubt has as one of its greatest tenants the separation of government and business to the maximum extent possible.
Traditionally the role of our Federal Reserve was to regulate banks and to act as the "lender of last resort" to these same banks in an effort to protect the public interest and maintain stability in the banking sector. Mission accomplished. During the last couple of weeks the Fed has taken the unprecedented-in-modern-times step of offering lending to the nation's largest investment banks, not just the largest commercial banks. Additionally, the Fed is taking on a much broader and deeper pool of collateral as backing for these loans as well. Industry estimates indicate that the largest investment banks have borrowed an average of about $30 billion daily under this new Fed facility.
Keep in mind what the markets have been experiencing during the last few months. They have been experiencing a lack of confidence, a lack of visibility and a lack of transparency. They have not been experiencing a lack of capital. By all measures Bear Stearns was well capitalized before the Fed forced its fire-sale to JP Morgan. Bear suffered a lack of confidence, not capital.
I'll be the first to stand up and err on the side of less government regulation and intervention, but in this case I believe it was entirely warranted. I don't believe it was warranted for the sake of Bear Stearns, but for the greater good (I hate that term) of the global financial picture. Temporary intervention is good, permanent and long-term intervention is not so good. Yes housing prices are down and most of our venerable institutions have been forced to take huge write-downs, but do I think the value of the assets will dwindle to zero? Of course not. The markets will correct and buyers and sellers will come to terms on price. But this must and will occur in an environment of transparency. The Fed actions have laid the foundation to provide this transparency and the beginnings, at least, of an underpinning of stability has been fostered in the last few days between the financial institutions.
Both the Dow and the S&P 500 finished the week essentially flat. Bonds gave up some ground with the 10 Year Treasury rising in yield to around 3.50%, up from 3.33% last week. Callable Agency spreads ended the week even to slightly narrower ahead of quarter end. Consumer spending in February rose only .1 percent, the lowest gain in more than a year as consumers clearly feel the pinch of higher prices at the pump. Commodities continue to be volatile. Last week Oil fell 7.6% to $101.84 per barrel while Gold fell by almost 8% to $920 an ounce. This week Oil us up around 4% to near $106.00 per barrel and Gold is up around 1.4% to near $933 an ounce.
I thought about titling today's article "Is Patience A Virtue Or A Vice?" but decided against it because I thought the history angle was more appropriate. But it warrants mentioning anyway. We have always been of the belief that patience is a virtue. But the uncertainty vice of a lack of confidence between financial institutions brought us to this dance. Fortunately, for tonight at least, our dance partner is the Federal Reserve. Continue to focus long-term and not on the latest thirty-second news cycle.
Fortunately for us long-term planning brought Garrison Asset Management to the dance. We haven't changed our focus or our thought process. We continue to try to execute, to try to find good value and to make well-informed decisions for each of you. Remember too that the decisions we make today and the actions we take on your behalf are not really for today. They are for the next three-to-five years and even the next decade. We believe the best results are achieved through well-placed conviction and a steadfast adherence to the proven discipline of a long-term view. We're on your side and we'll get through this together.
If you have any questions please call us at 877-442-0042. Please feel free to forward this email to your friends and family by clicking on the forward link at the bottom of the page. As always it is a pleasure serving your investment needs.
Have a great weekend!
Glenn E. Atkins, CFA
http://www.garrisonassetmanagement.com/
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