Moneta Group

The ongoing market volatility has sapped confidence and has many investors asking, “Is this another 2008?” and “Can I emotionally survive another downturn?” These are timely questions without easy answers. Equity volatility, by any measure, has increased dramatically since the beginning of August. One widely-followed measure is the Chicago Board Options Exchange Volatility Index (VIX ), which recently touched levels last seen during the 2008 credit crisis. However, most investors have their own ‘stomach acid’ indicator which, with 500 point swings during several trading sessions, has kicked into high gear. Trying to divine if the market (as measured by the S&P 500) is poised for another 51 percent drawdown is, as always, an unwinnable proposition. However, it is useful to be mindful of the fact that despite the challenges currently facing the economy, valuations for equities are much better today than when the market peaked in the fall of 2007.

• Dividend yields – The S&P 500 yields approximately 2.3 percent today vs. 1.80 percent at the market peak in October 2007. Today the S&P yields more than the 10-year Treasury bond (2.3 percent vs. 2.08 percent). Today’s yield is obviously a function of lower prices, but dividends-per-share for the S&P have actually increased since bottoming in the third quarter of 2009 after many financial companies that took TARP assistance reduced dividends to de minimus amounts.

Recent news has resulted in heightened sensitivity to risks inherent in the fixed income markets; however, our philosophy remains unchanged. We view fixed income as an asset class to generate current income and help mitigate equity market risk. Based on current market conditions (the level of yields, risk premiums, and recent ratings actions) we don’t feel a need to alter our core philosophy and buying parameters as it relates specifically to fixed income.

Although it’s difficult for investors not to focus on the recent (mostly) downside volatility in the equity markets, the fixed income markets have had an equally eventful period and significant price movements also. Two events over the past three trading days will have important and ongoing impacts on the credit markets.

When the financial news is bad (which it has been as we watched our elected officials play at politics while debating the raising of the debt ceiling) our clients begin to worry. Moneta Group's message doesn't change because the headlines are telling us to run for the hills. We still recommend sticking with a long-term strategy based on a diversified portfolio across multiple asset classes and strategies and, as always, we advise clients against making decisions driven by fear. But when global economic news is grim and the market is falling, that might not be what our clients want to hear.

The facts of the situation are often less exciting and sometimes more complex, and they don't usually make for great headlines, but they are important in helping clients understand our thinking. We believe this is what you expect from us; information about what we think of the current situation.

Recent media buzz surrounds comments made in a December 19, 2010 interview on "60 Minutes with Meredith Whitney, banking analyst and frequent contributor to CNBC, Fox Business, and Bloomberg News programs. On the topic of municipal bonds, Whitney said, "You could see 50 sizeable defaults, fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults." (see interview from "60 Minutes": http://www.youtube.com/watch?v=CP4QHNJ7EWo&feature=related

However, May 23 on Bloomberg Radio hosted by Tom Keene, Whitney is quoted as saying, "I never said that there would be hundreds of billions of defaults. It was never a precise estimate over a specific period of time." As for the timing of the predicted defaults, on the "60 Minutes" segment, she said, "It'll be something to worry about within the next 12 months." Yet in her Bloomberg interview she said, "In the cycle of this municipal downturn, I stand by it. But we never had a specific estimate for that. That's not the nature of our research."

Recent media buzz surrounds comments made in a December 19, 2010 interview on "60 Minutes with Meredith Whitney, banking analyst and frequent contributor to CNBC, Fox Business, and Bloomberg News programs. On the topic of municipal bonds, Whitney said, "You could see 50 sizeable defaults, fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults." (see interview from "60 Minutes": http://www.youtube.com/watch?v=CP4QHNJ7EWo)

However, May 23 on Bloomberg Radio hosted by Tom Keene, Whitney is quoted as saying, "I never said that there would be hundreds of billions of defaults. It was never a precise estimate over a specific period of time." As for the timing of the predicted defaults, on the "60 Minutes" segment, she said, "It'll be something to worry about within the next 12 months." Yet in her Bloomberg interview she said, "In the cycle of this municipal downturn, I stand by it. But we never had a specific estimate for that. That's not the nature of our research."