September 2008 - Quiver Quarterly

As I write to you today I am watching the market continue to decline to levels not seen since 2004 and feel a sigh of relief that our accounts have allocations of cash between 65% to 100%. Since I last wrote and repositioned more of our assets to cash we have seen significant changes both fundamentally and technically in the economy and the markets. Many of you may be wondering why the markets are declining so much so fast and where will it end. If you are not a client of Quiver and your advisor hasn’t repositioned your portfolio to be more conservative then you may be wondering what you should do now with the S&P 500 down more than 30% since January.

First let me address why good quality stocks like AK Steel that we sold at $60 is now at $16 or Freeport McMoran which we sold at $100 now at $45 or even Coca Cola we sold in the $60 range now at $50. The reason such good quality companies are being sold with aggression is multi faceted and I will work through a couple of the reasons one by one.

1. Hedge Fund Liquidations – Many Hedge Funds which manage money for pension accounts are being forced to liquidate their stock and commodity holdings as their clients are closing accounts due to poor performance and concern about the future of the economy. This causes a large number of investors to be forced into selling regardless of fundamentals in a market where there are very few buyers. This phenomenon will create some great opportunities as many stocks will get oversold and anyone sitting on cash will be able to buy good quality companies at one of the biggest discounts ever seen.

2. Economic Concerns – For months there has been a debate about recession. Are we in a recession or not? Within the last two weeks anyone who was on the “no” side of that debate has conceded and converted from being “cautiously optimistic” to out-right scared and pessimistic. Here are the facts as I see them and hear from others that are deeper in the trenches. If a majority of the economic growth since 2003 in the U.S. and the rest of the world was on the back of housing, and housing is dead in the water, then all the earnings and stock growth of all companies since 2003 needs to be reexamined. What is happening in recent weeks is that all investors are coming to this realization. They are all realizing that without housing there was very little growth in the economy and as a result they are re-pricing stocks back to the earnings level of 2005 and in my belief will stop re-pricing lower when they reach the levels of 2003 (which means lower from here).

3. History Repeats Itself – Many of you have seen the graphs I use in discussing secular markets and the fact that secular bear markets last 10 to 15 years. This occurred from 1966 to 1980. In these secular bear markets there is a greater propensity for the market to decline and test the lows it created in the last economic down turn. For this day and age that is the market lows of 2003 which means we could see the S&P 500 decline to 800 (now at 1029) and the Dow down to 8000(now at 9700). This decline won’t happen at once but will most likely occur over the next year.

I realize all that sounds pretty scary, and I need you to understand that this is a worst case scenario in my opinion, but there are things you can do if you understand how these situations typically work themselves out. Here is what should occur. First, the market is grossly oversold in the short term. There has been too much selling too fast. This usually gets resolved with an aggressive “snap back rally”. In this environment you could see this snap back rally move the Dow back up to 10,600 (which is an increase of 7 to 8% from where we are today) as a test of its last level of support. Rule of thumb, if this rally occurs it should be sold not bought if you are an investor. Why, you ask? Because the trend of the market is down and until we see the markets break above 10,600 and stay above that level for an extended period of time you have to let the trend be your friend. This gives anyone who has not been able to move their investments to cash before today a chance to do so at higher prices. At Quiver we will be liquidating the last few fragmented holdings we have in our accounts on this rally unless there is something out there that I am not aware of which causes me to change my opinion. The next rule of thumb is to invest into a bear market fund or stay in cash until you see the markets successfully test and hold the lows that are being created this week.

Bottom line is this, the fundamentals of the economy and the market have deteriated and the risk of the market declining to the lows of 2003 has greatly increased. For our clients we have a lot of dry powder by the large sums of cash we hold in our accounts and we will benefit. Also remember there are other investments outside of the stock market that will help us earn a return. For other investors who do not have the luxury of having dry powder my suggestion is to sell into any strength you see in this market and store up on cash. If you need more detail on when and what prices to sell at I suggest contacting my office.

In times of chaos is when we find the most profitable opportunities and this time will be no different. These difficult times will not last forever and the markets will recover prior to the economy and just as quickly as things got negative they can turn to the positive as well. For this reason I will keep my eye on the ball and wait for the right pitch before we move forward. I encourage any of you to contact me with any specific questions or concerns you may have.

Warmest Regards

Colby McFadden

*The opinions expressed are those of Colby McFadden as of 10/6/08 and are subject to change due to market and other conditions