September 2008 - AIA Advocate for Absolute Returns

In This Issue:

Most Economists Believe The Rescue Plan Will Work
Others Say It Will Only Postpone The Inevitable
We Think The Optimists Are Right
Meanwhile, Here's An All-Weather Investment Plan
The Bottom Line This Week

We've been suspicious for several weeks that Mother Market was not happy about taking a back seat to the recent Olympic games in China. To gain back some of the limelight she has been making bigger swings, jumps, and dives than anything we saw in Beijing. Her efforts are clearly working because nothing else has been able to push financial news off the front pages.

Last week, the market made yet another volatility record, not that anybody wanted to see it. On four of the five days, prices changed over 300 points. Nevertheless, when the dust settled, and the bodies were swept up, the Dow was only down a miniscule 0.3%. The Nasdaq actually managed to rise 0.6%. If you happened to be in Transylvania during the festivities, you might not have known how much fun the rest of us had.

The race for new records continued when the market opened on Monday of this week, and stocks dropped 373 points. Prices started to settle down on Tuesday and Wednesday when stocks fell 162 points and 29 points respectively. Given the circumstances, it is too much to hope that the high volatility will end anytime soon.

In This Issue:

Feds Ease The Mortgage Threat, But Create New Problems
Housing Is Now More Political Than Ever
Top-Yielding CDs Blast Treasury Returns
India's Outsourcing Stocks Are Again Attractive
The Bottom Line This Week

Two weeks ago, investors were inclined to ignore moderately bad news because they were focused on what looked like a coming economic recovery. Last Thursday, however, the optimism evaporated when the unemployment rate jumped unexpectedly. Rumors of additional problems with insolvent hedge funds added to the angst, as did growing worries about the king-sized problems at Fannie Mae and Freddie Mac.

Investors put it all together and decided the outlook wasn't as encouraging as they first thought. In fact, it was starting to look as if a further economic slowdown could be in the works.

When the new forecast made the rounds, the market dropped 345 points. We had a tepid 33 point rebound on Friday, but it fell into the faint praise category which actually deepened the gloom. When the final bell rang for the week, the Dow and the Nasdaq were down 2.8% and 4.7% respectively.

Over the weekend, however, the outlook went from dead black to positively upbeat when Treasury Secretary Paulson announced his benevolent agency would rescue Fannie and Freddie. On Monday, jubilant investors pushed the market back up 290 points.