Elizabeth B. Dater,
Chief Investment Officer
The quarter ending March 31, 2008 provided no safe haven for optimistic long term investors. Pressures on global equity markets began the first trading day of the New Year as news unfolded about continuing financial strains arising from the housing and mortgage markets, debate intensified about the probability of a domestic recession, and then culminated with the March 13th run on Bear Stearns and its subsequent rescue by the Federal Reserve and JP Morgan Chase.
While it is tempting to take a pessimistic point of view at this time, it is important to keep perspective and to understand that many factors are in place to suggest a classic bottoming for the U.S. stock market. The unwinding of a credit bubble such as we are seeing involves an enormous amount of deleveraging. We are in a period of extreme sentiment
The Federal Reserve has set up a number of powerful new liquidity facilities and the government is providing tax rebates to millions of households. We believe that these actions will win the day.
It is most encouraging to see much thought and analysis encompassing both traditional and new innovative policies and actions. There is clearly no one shot remedy for the current complexity in our financial systems but we believe that there will be resolutions through a coordinated government effort that will motivate and encourage the direct involvement of a broad group of non-traditional and private sector investors. Therein will lie significant opportunity for long term equity investors. Many non-financial companies are attractive now.
We have been consistent in stating our confidence in the diversity and balance that comprises the U.S. economy. In the consumer sector, household balance sheets are in strong shape, with a high quotient of liquidity. While spending patterns and confidence are being impacted by higher food and energy costs, overall retail activity remains moderately positive and the upcoming tax rebate should be viewed as a modest positive. Employment growth has slowed over the past year and has recently turned negative but actual employment levels remain high. Corporations are in excellent financial health – debt is at low levels and liquidity is at, or near, record levels. Again, confidence measures reflect concern about slowing domestic economic activity and financial system volatility. But, competitive realities and foreign market opportunities should result in ongoing expansion. Importantly, earnings and cash flow in the non-financial areas continue to grow and are supportive of dividend increases and stock buy-backs and merger activity.
Investors are understandably skittish because many aspects of the current situation are occurring in uncharted waters and there are many moving parts including currency policies and future political considerations.
It is our belief that the combination of actions that the Fed has led recently will prove successful in breaking the constriction in the credit markets. This in turn will be instrumental in restoring transparency and trust in the world capital markets. Importantly the early steps will have a beneficial economic effect by restoring business and consumer confidence.
It is difficult to make a crystal clear assessment of the equity markets at this time, but we are making no radical changes to our portfolios. As long term investors, we are reasonably positive. Our equity strategies will continue to emphasize companies that will benefit from global infrastructure and development, provide technology products and systems for productivity enhancement and capitalize on broad demographic trends such as health care and unique innovative consumer products. As always, our fundamental strategies encompass company and industry prospects stringent valuation standards, assessment of management, and an analysis of capital structures.
It is likely that it will take some time for conviction to return to the markets and for conditions to improve on a broad scale. We remain committed to providing our investors with above average long term capital appreciation and thank you for your continued support.
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