Fisher Investments MarketMinder

Fisher Investments MarketMinder: Trial by Fire

Originally published by Fisher Investments MarketMinder on: 3/14/2008

Free markets thrive on mistakes. Through trial by fire, market participants become smarter, stronger and better able to deal with the rigors of the marketplace. Yet the knee-jerk reaction by government to any problem (real or perceived) is to revoke privileges and regulate, regulate, regulate—as if we’re witless children in need of constant supervision.

So far, politicians’ protectionist rhetoric has failed to materialize, and the Fed’s recent moves to bolster liquidity in capital markets have been generally helpful without being intrusive. (See our past commentary “Pawning Stocks,” 3/12/2008, for more.) We really haven’t seen anything particularly ridiculous from the Beltway since Sarbanes-Oxley. But like Maude Flanders breaking in on Bernanke and the Fed to shrilly query, “Will someone please think of the children!?” recent headlines shout it’s high time our elected officials saved us. Coupled with Bernanke’s call for action in his Congressional testimony last week, Treasury Secretary Paulson’s comments this morning make harmful, potential regulation a threat worth watching.

Thus far, Paulson has seemed staunchly opposed to excessive government intervention. Today he presented a policy statement and recommendations for action from the President’s Working Group on Financial Markets (PWG). The PWG includes representation from the Treasury Department, the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission and was called upon last August to examine perceived trouble in financial markets. (Presidential committees are always a bit of a charade. Of course they recommend action—they exist expressly to recommend action!) . . . .

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Fisher Investments MarketMinder: It’s a Materials World

Originally published by Fisher Investments MarketMinder on: 3/13/2008

As Madonna, a recent inductee to the Rock & Roll Hall of Fame, aptly sang years ago, “You know that we are living in a material world.” How sage. There’s no question ours is a Materials world: Materials insulate our houses, channel electricity to our lamps, make up the pages of our favorite books, and provide the infrastructure and the fuel for our cars. But surging Materials prices have investors fearing our addiction to material goods will only keep prices, and inflation, rising.

Should we fear Materials prices rising forever, propelling inflation into astral territory? While we should expect commodity prices to remain firm and continue to rise in the foreseeable future, higher commodity prices today aren’t symptomatic of runaway inflation and aren’t cause for panic. Commodity prices are driven by imbalances between supply and demand—like any freely traded good—and with today’s demand drivers and supply constraints, recent price increases shouldn’t shock . . . .

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Fisher Investments MarketMinder: Pawning Stocks

Originally published by Fisher Investments MarketMinder on: 3/12/2008

Picture your average musician shuffling into a pawn shop with guitar in hand (maybe that prized sunburst Les Paul), taking a short-term loan to pay the rent when the credit card is maxed out and the paycheck from the last big gig is still in the mail.  It’s not fun to have to trade the trusty axe for cash, but the bills must be paid.

It’s easy to imagine some financial institutions in the same situation.

You may have recently heard the term “de-leveraging.” What exactly is de-leveraging?  It’s the process undertaken to reduce a company's financial leverage. Financial leverage (aka debt relative to equity) is the very basis for a financial institution to generate profits, but if it falls outside certain bounds set by regulators, it needs to be reduced back to “acceptable” levels in short order.

Many big financial institutions invested heavily in relatively obscure vehicles like mortgage-backed securities in recent years.  Following deterioration in their creditworthiness, the market for these securities is almost barren today.  Even small amounts of selling have lead to massive price drops due to a scarcity of bidders.  As the market value (marked-to-market sometimes based on guesswork) of these instruments decline, the leverage ratio of the investor goes up.  In the case of banks, brokers and insurance companies, regulatory requirements mandate leverage be reduced, forcing them to sell any available liquid assets.  In the case of hedge funds, margin calls or investor withdrawals can force the same.  In many instances, stocks have been the best candidate for selling, since they’re more liquid and less useful for capital adequacy requirements than other securities. The titans of Wall Street pawning their stocks to pay the rent! How sad . . . .

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