"A long streak of speculative lending got out of hand as banks and even staid industrial companies made a stream of risky loans. Consumer spending on cars and clothes was slipping, but no one seemed to pay attention. The stock market grew shaky in September, and then in October, the bottom fell out." Karen Blumenthal, The Wall Street Journal, October 8, 2008

Sound familiar? She's not referring to our current crisis, but rather to 1929. The start of "The Great Depression" (cue spooky music here). As we all know, the market fell apart, brokers jumped out of windows, banks collapsed, unemployment soared. To this day, those who lived through it have a very different perspective on economics and the use of credit than those of later generations.

Almost anyone you meet has an opinion on the current crisis, and nearly all are doling out large doses of pessimism. People are experiencing dramatic reductions in the values of their homes, their 401k plans are down 30% or more, unemployment is increasing, banks are failing, huge brokerage firms that were staples of the Wall Street landscape no longer exist. Who wouldn't be pessimistic?

It feels like it continues to get worse and worse. The market was off another ___on Monday, followed by a 508 point slide yesterday. The first week of October has seen the same level of losses as the entire month of September, which was pretty ugly in its own right.

At 5:00 this morning, the futures market was pointing to a drop of about 200 points at the open of the market. About an hour or so later, the Fed announced a 50 basis point (1/2 of 1%) interest rate cut. More importantly, the cut had been coordinated with cuts in lending rates by Central banks around the world. The futures reversed course dramatically to an up indication of well over 100 points. But that fizzled too. By the time the market opened, it was down about 200 again. And then the ride began.

Within the first 30 minutes, we swung from 200+ down to about 150 up. Then the sellers took hold again, driving the Dow back down. We gave up the 150, plus another 200+. The rest of the day continued in similar fashion. As I went to lunch, we were on an up trend, and went positive shortly after noon (Central time). For much of the afternoon it appeared we would have a good day. But as I've said time and again, it doesn't count till the market's closed. By the time it finally did, we were down 191 points on the Dow.

So now what? We got the rescue plan going, we've had banks sold to other banks, brokers sold to banks, the government increasing deposit insurance and guaranteeing money market funds, the Treasury buying commercial paper, global interest rate cuts, foreign countries working to stabilize their financial systems, and Presidential candidates weighing in on the crisis. But it doesn't seem to be enough to satisfy the market. The news of each of these moves to improve stability has resulted in another decline in the market. The pessimism is at levels that we haven't seen in decades.

The saying "it's always darkest before the dawn" may be appropriate here. Historically, the best time to begin buying in the market is when common knowledge is "GET OUT OF THE MARKET!!!" It's sort of like a bubble, only in reverse. In a bubble, everyone wants to buy an asset, and they're convinced that the asset can only go up (think dot coms in 2000, real estate for the last 6 years, or Dutch tulips in the 1600s). Our situation now is reversed. Everyone is convinced that the market can only go down from here. This is an indicator that we may be near the bottom. The VIX, a volatility indicator, reached an all time high today. Another indicator that we may be near the bottom.

We have continued to pare holdings that we believe may be sensitive as more information comes to light. At the same time, we are actively looking to purchase stocks and have made a few purchases of companies that look particularly attractive. We have a short list of stocks that we intend to purchase, but we will be selective about the timing of the purchases as new information comes into the market.

I started this entry with a quote that referred to the Great Depression. I'll end it with a little historical perspective:

If one invested $100,000 in July of 1932 (the bottom of the market during the Depression), within 1 month her account had grown to $126,000. By year end it was up to $140,000. At the end of 5 years it had grown to $435,000. In 1950 it broke a half million dollars. She was a millionaire by June 1955. Today, that investment would be worth $25.3 million.

In contrast, our investor's pessimistic friend chose to sit on the sidelines and wait to see if it had really settled out. He missed a lot of the upside. If he waited one year to buy in, his account would have only been worth $159,000 at the end of 5 years. In 1950, he would have only had $243,000, less than half of the above scenario. The story stays the same from there on out: in June 1955 he has half the money his friend does, and today, his account has grown to $12.3 million, less than half of what he would have had if he had invested a year earlier.

The point of this is that we need to keep an appropriate strategy in place, and work within the framework of that strategy as we move forward through these trying times.

If you have any questions, please feel free to email me at nsnodgrass@evanstonadvisors.com