Stocks – and Everything Else – Take a Big Fall

After seesawing through the summer between gut-wrenching triple-digit selloffs and euphoric triple-digit rallies, the stock market last week appeared to have finally made up its mind.

And it wasn’t pretty.

Yet another wave of concern over European debt and fresh fears that the U.S. is sliding back into recession whacked investments across the board, from emerging markets to gold futures, small caps to blue chips.

The Dow Jones Industrial Average of 30 big stocks tumbled 6.4%, the Dow’s worst week since Oct. 10, 2008. The broader Standard & Poor’s 500-stock index finished down 6.5%, while the tech-dominiated Nasdaq Composite dropped 5.3%. Asian and European indexes logged similar declines.

Oil prices fell 9.2%. Silver fell 26%. And even gold, the market darling of the past year, dropped 9.6%.

And adding insult to all those investors’ injuries: Yields on the benchmark 10-year U.S. Treasury note fell to 1.8% — a nice value boost for bondholders to be sure, but still just $18 annual interest income on a $1,000 bond.

Here are some questions and answers to explain how we got into this mess, where things go from here and what investors can do about it:

Q: What happened in the market last week and why?

A: For months, investors have been worried about European debt problems and weak growth in the U.S.
Last week, the Federal Reserve gave the U.S. economy a bleak prognosis. And while the Fed will buy long-term debt, to try to push down home-mortgage and other interest rates, it already has attempted to juice the economy with two major “quantitative easing” efforts over the past two years — with little impact.

There’s also little the government can do, as political and debt pressures make it impossible to launch a big spending program. As such, the U.S. economy will have to dig itself out of its hole without much help, a challenging task.

Q: Anything else worrying markets?

A: White-hot growth in nations such as China and Brazil once encouraged even gloomy investors. But signs are pointing to a slowdown in almost every market, adding to the jitters.

“The world is now in a synchronized slowdown,” says Mohamed A. El-Erian, chief executive of Pacific Investment Management Co.

Q: Why is there so much focus on Greece, a tiny nation?

A: Greece is only 2% of the European economy. But the country has piled up enough debt to worry investors. Greece is taking a series of painful steps to try to raise cash and reduce spending. And European nations and international bodies have forged a plan to trade new debt for old debt to fill Greece’s financing gaps to allow it to enact reforms.

But investors are growing more convinced Greece won’t be able to pay debt that’s expected to amount to nearly twice the value of its annual production, and that those who hold Greek debt will deal with losses.

Q: Why is that a big deal?

A: The fact that Greece shares a currency, the euro, with other European nations raises questions about the future of that currency.

Just as important, any Greek default could make already-skittish investors even less likely to lend to other European nations with heavy debts, such as Portugal, Ireland, Spain and Italy. That will force those nations to pay even more to borrow money.

Since most of these countries are much bigger than Greece, any additional problems could weigh on the global economy. Meanwhile, big European banks hold the debt of all these nations, something that has investors wringing their hands about the health of these banks.

Q: Are we in for another crash? A financial crisis? Is this just like 2008?

A: In 2008, subprime-mortgage problems infected all global markets. One thing learned from that downturn is how interconnected global economies are. If European banks take it on the chin, it could put pressure on other financial players and push an already-weak U.S. economy into a recession.

“If it is not careful, Europe is getting very close to tipping into a recession and a banking crisis,” says Mr. El-Erian.

Q: Is there a savior out there?

A: Optimists say Germany, perhaps along with other international bodies, could infuse European banks with cash and bail out various European nations if needed. They would need to write big checks, however, and the outcry from some German taxpayers likely would be huge, raising questions of whether that is possible.

Q: Is it all doom and gloom?

A: Hardly. Oil and food prices are falling. Thirty-year mortgage rates are expected to drop to about 4% over the next week. Those looking to buy a home can find a bargain. Companies are sitting on record amounts of cash. U.S. banks have replenished their balance sheets. And U.S. and European stocks aren’t at expensive levels.

Greek leaders have vowed the nation won’t default, and Germany and France continue to pledge support.

The most upbeat scenario: The global economy muddles along, debtor nations slowly pay down debts, the U.S. averts a recession and the stock market finds its legs.

Q: So what should investors do?

A: John Brynjolfsson, who runs hedge fund Armored Wolf, says investors should remain cautious, hold ample cash and stick with larger, safer companies.

“As long as their time horizon is at least a couple of years, individuals should be compiling a wish list of securities they’d like to buy in case prices go lower,” says Darren Pollock, portfolio manager at Cheviot Value Management.

Mr. Pollock is a fan of Wal-Mart Stores (WMT), Berkshire Hathaway (BRKA/BRKB), Microsoft (MSFT), and health-care behemoths like Pfizer (PFE), Johnson & Johnson (JNJ) and Merck (MRK).


The securities discussed in the posted article are current holdings of Cheviot’s clients. The viewer should not assume that investments in the securities identified and discussed were or will be profitable and it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. All information is provided for informational purposes only and should not be deemed as a recommendation to buy the securities mentioned. Cheviot closely monitors its positions and may make changes to the portfolio’s investment strategy when warranted by changing market conditions. If a security’s underlying fundamentals or valuation measures change, Cheviot will reevaluate its position and may sell part or all of its position. There can be no assurance that Cheviot’s clients will continue to hold the same position in companies described herein, and their portfolio positions may change at any time.
For additional Information:
·         Recommendations made by Cheviot during the previous 12 months
If you have any questions on specific recommendations mentioned in the list, please contact Cheviot.
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