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Source: E-mail invitationLocation: Wildfire Restaurant, McLean, VASponsor: Wachovia Wealth ManagementTopic: Impact of current issues on investmentsSpeaker: Mr. Wiley Angell (son of Federal Reserve Board’s Wayne Angell)Credentials, Brokers, Associations, Endorsements: Executive Managing Director of Fiduciary Asset Management Company (FAMCO)Immediate pressure: NoneAppointments: None offered.Information Requested: None requested.Rate of Return: None specified.Investments Discussed: Stocks and bonds.Phrases emphasized: Stay the course.Meal: Bread, salad, mashed potatoes, steamed broccoli, chicken breast.Warm-up discussion by Peter Clarke: Famco’s investment management style for its $16B portfolio is a “top-down” approach, driven by Famco’s interpretation of economic conditions, monetary policy, and Federal Reserve actions.Main discussion by Wiley Angell: Credit markets are currently shutdown. There is almost no market today for commercial paper. Even a company as strong as General Electric can’t sell its commercial paper.Fannie Mae was forced by Congress to make subprime mortgages. Now the federal government must step in and bail out the mortgage system. Still, the mortgage mess is not completely bad. Mortgage delinquencies are about 4%, meaning 96% of mortgages are performing. About 38% of subprime mortgages are underwater, again implying that about 62% are performing.The government may not lose money in a bailout. The worst mortgages can be purchased for pennies on the dollar. Over time, the government may be able to sell their acquired mortgages at a profit.The Federal Reserve is supplying massive reserves, but this has had no effect on velocity. The monetary base has been stagnant for 3 years.Oil prices are coming down. For smog control during the Olympics, China switched from coal to oil because oil is cleaner. This drove up the international demand for oil. Now China is back to using coal as its primary energy source.The midwest portion of the U.S. is in the best shape because it has two strong sectors, the oil industry and agriculture. But throughout the U.S. there are many very strong companies that can compete in international markets: these include Caterpillar, Deere, and Otis Elevators.Sometime during Summer 2009, the Department of Commerce will issue revised data covering Fall 2008. These data will likely show that we are now in a recession. Consumers are spending less. This recession may get worse, but it will be short lived. Home buyers are forced by new mortgage requirements to pull approximately 20% of the cost of their homes out of the stock market to use for down payments. Nevertheless, there are already some signs of recovery. Since July, housing prices have risen in 9 of 20 reporting markets.Several discouraging signs remain in the economy. These include the fact that financial, housing, and auto sectors are already in a recession; the failure of the Fed to lower interest rates at its last meeting; and a monetary base that is near the level of a year ago.There are several encouraging signs for a recovery. These include stable profitability from companies not in finance, housing, or autos; a declining inflation rate; approaching resolution of the Fannie Mae and Freddie Mac situation; real estate prices that may be bottoming; and a domestic economy that is outpacing Europe’s.At the beginning of 2008, the stock market had a PE of 15. Now the ratio is about 10.5. Valuations are very attractive. The Middle East is now buying U.S. assets. [DJIA closed at 10,483 on 10/2/2008.]The best stocks to buy will be companies that have large cash holdings or that generate large cash flows. These companies are able to self finance their business growth. Thus, large-cap growth stocks and technology companies will outperform value stocks. Do not own Lehman Brothers, Merrill Lynch, or AIG. Be underweighted in the energy sector. Some financial stocks (financial services, commercial banks, and Goldman Sachs) will become great values. Early cyclical industries involved in transportation and consumer discretionary spending will be good stock sectors during the recovery.
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