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SKARBECK: Market a bright spot amid worrisome economy

October 17, 2009

The financial media have the corks ready to pop as the Dow Jones industrial average re-crosses what pundits claim is the “psychologically important” 10,000 level.

What a short, strange trip it has been. At this time last year, the stock market was in the throes of a meltdown. Entering October 2008, investors were reeling from the failure of financial giants Fannie Mae, Freddie Mac and Lehman Brothers. The credit markets were in gridlock and the government was injecting massive amounts of taxpayer money to bail out our financial system. Even the safety of money market funds—long considered the closest thing to a guaranteed liquid investment—was in doubt.

During the 23 trading days of October 2008, there were seven days when the DJIA dropped more than 300 points, led by a 679-point decline on Oct. 9 and 733-point tanking on Oct. 15 (as I recall, the office Grey Goose came out after 4 p.m. that day). There were also four huge “up” days in October; notably, a leap of 936 points on the 13th and a jump of 889 points on the 28th.

Alas, by the end of the month, the index had dropped 1,500 points, or 14 percent. In the months to follow, the market would continue to sink another 30 percent before bottoming at 6,547 on March 9, 2009.

And now, here we are just seven months later in the midst of a stock market that has boomeranged 52 percent to the upside. Remarkably, an index fund investor who held for the one-year round trip is up about 7 percent.

And while the market’s recovery has been a momentum investor’s playground, even fundamentally oriented investors can point to some positives. On balance, corporate America has weathered the storm quite well. Businesses got out in front of the severe economic downturn by ruthlessly cutting costs, accomplished primarily via job cuts. Now, as the economy begins to recover and companies replenish inventories, earnings appear on the verge of rebounding smartly from their earlier trough.

Ironically and perhaps unjustly, the biggest turnaround has materialized at the very Wall Street firms that were at the heart of the financial disaster. The firms left standing have made billions in profits in 2009 on fees earned from issuing the massive stock and bond offerings that have enabled banks, REITs and businesses to repair their balance sheets. The trading desks of Wall Street firms also benefited from nearly zero-percent borrowing rates to fund their operations. In addition, the controversial practice of high-frequency trading has generated massive profits this year.

Now, for those with a weak stomach, please turn away. As a result of this bonanza, bonuses on Wall Street are poised to set all-time records! It is estimated that $140 billion has been earmarked for compensation and benefits for employees at banks and securities firms, surpassing the $130 billion doled out in 2007.

So, a year has passed and much seems forgotten. However, if, as they say, “a bull market climbs a wall of worry,” we may need to call on Spiderman for the market to slow its vertical ascent. Unemployment lingers near 10 percent, troubled commercial real estate loans will cause more bank failures, the FDIC is broke, trillions in government debt, state revenues falling off a cliff, a stretched consumer. Yada, yada, yada. But, hey, at least those monthly portfolio statements don’t look so bad anymore.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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