The Big Picture for the Week of October 24, 2004

The equity market has continued to deteriorate and the bond market has continued to flatten. This week may be a little better than last week's news driven slide. First, on a short term basis, the market is clearly oversold so a snap back, even if just fleeting, would not be a surprise. Also since 1980 the S+P 500 has been up 1% on average the last full week before the election with 1980 being lone down pre-election week. 2000 was also an exception in that the S+P was up about 3%.

There is an old adage about the direction of the stock market from the incumbent convention to election day determines who wins. The Dow needs to add 500 points this week for Bush to win, if you believe in that sort of thing. I am totally apolitcal but I think what may happen is Bush wins the popular but Kerry wins the electoral college vote, just a gut feeling. I will be shocked if we have a repeat of the 2000 debacle trying to figure the winner.

There was an interesting article in the New York Times business section about the impact of the Marsh & McClennan blowup. The article said the rank and file employees are forced to own a bunch of Marsh stock in their various retirement plans. There are some very sinister sounding elements to this aspect of the story.

The insurance scandal has been bad for everyone except Eliot Spitzer. This has hurt all sorts of index fund investors that have nothing to do with the malfeasance that has occurred. I can't see how such a public prosecution was the best way to go. Had he gone to them privately and worked out repaying clients for what they were overcharged and announced the resolution after the fact I doubt we would have had all this lost market cap. AIG has lost close to $60 billion in market cap and Marsh has lost about $12 billion. Additionally a lot of uninvolved insurers have been hit too. Not good.

So you know I am not talking my book, I have never owned an insurance stock for myself or for clients and I have been underweight the financial sector for 18 months. I have focused on foreign banks as opposed to US banks, other than my Bank of America position. I like foreign banks because there are plenty of good banks to choose from with very high dividends and low betas which ties into an ongoing theme of mine. My portfolios are roughly 29% invested in foreign stocks. I would offer a word of caution about banks from the UK. The banks themselves seem to be very well run solid companies. I don't really see any bottoms up problems. But from the top down there may be an issue to worry about and pay attention to. The UK yield curve is flat. This usually means an economic slow down of some magnitude. We are not there yet but it should be monitored closely.

Lastly a word about the Red Sox. They have won the first game of the World Series in a strange fashion, but win they did. Beating the Yankees was great, but just a step. Now they need to focus on beating the Cardinals. I have no idea if they will win or not but they showed last night that they have come to play hard and try to win.