The current financial crisis reminds me of a movie from the 50’s, “The Day the Earth Stood Still”. With a frozen and fearful credit market, lending for virtually everything has stopped. A true panic has caused runs on money market funds and banks (WAMU saw $16.5 billion withdrawn from its bank in the week before it was seized by the FDIC). These are supposed to be the “safe” places to put your money. Goldman Sachs, the most revered of all investment banks, recently had to borrow money from Warren Buffet at 10% interest. If Goldman Sachs has to pay 10%, everyone else down the food chain has to pay more. This also means that the yield on corporate and muni bonds have sky rocketed, driving their prices down. The value of our well diversified Optivest portfolios, including Commercial Property, Trust Deeds and Hedge Funds really shines in times like these.
Thank goodness for broad diversification in our investment portfolios. While the portion of our accounts that are in unhedged stocks and bonds have been subject to the worst bear market since the Great Depression, our diversification into real estate, trust deeds and hedged stock and bond funds have held most accounts to losses in the low single digits. Stable, cash flowing assets never looked so good…
Despite a weak economy and stock market, Optivest investors experienced a surprisingly good second quarter. All of our hedge fund investments were up, our Sector Logic stock portfolios were up 8% and our real estate investments performed as expected. The only disappointment has been our Schwab Bond investments which remain at discounted levels; however, they continue to pay uninterrupted cash flow.
What a wild ride the first three months of the year has been! The sub prime mortgage problem, compounded by highly leveraged investment vehicles (CDOs), caused a bona fide banking panic culminating in the mid March government sponsored bail out of Bear Stearns, steep drops in the stock markets and the floating of $200 billion of Federal Funds to help weak financial institutions meet minimum capital requirements.