Ben Fischer, Managing Director

NFJ

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NFJ’s Ben Fischer puts the current global market volatility in historical context.

Twelve Crises

NFJ sees this current credit crunch as just the latest in a succession of crises. They come along every few years, and we’ve always found a way out of them.

• 1970: Penn Central Railroad Failure. Largest corporate bankruptcy in American history up until that time. The American financial system is shocked. A general corporate credit crunch ensues, particularly in the commercial-paper market.
• 1974: Franklin National Insolvency. The nation’s 20th-largest bank is declared insolvent due to losses stemming from mismanagement and fraud.
• 1980: First Penn Failure. The FDIC, Federal Reserve and the Office of the Comptroller of the Currency (OCC) bail out failing Pennsylvania bank with $500 million in notes and $1 billion credit line.
• 1982: Latin America Credit Crisis. Mexico’s inability to make loan payments sparks panic and sets off a financial crisis as foreign debt exceeds the earning power of many Latin American countries.
• 1984: Continental Illinois Failure. FDIC injects $4.5 billion to purchase bad loans of Continental Illinois National Bank and Trust, considered “too big to fail.”
• 1987: Black Monday. U.S. equity markets record largest one-day percentage decline in history; U.S. Federal Reserve and other central banks add liquidity to prevent further decline.
• 1989: S&L Crisis. More than 700 savings and loan associations in the United States begin to fail. Estimated crisis cost: $160 billion.
• 1994: Mexican Peso Crisis. Sudden devaluation of the Mexican peso at the beginning of Ernesto Zedillo’s presidency triggers panic.
• 1997: Asian Credit Crisis. Bad banking practices in emerging Asian economies threaten Latin America and other emerging market economies.
• 1998: Russia/Long-Term Capital Management Crises. Russia’s currency devaluation backfires, triggering panic and drying up foreign capital inflows to emerging economies. U.S. hedge fund giant LTCM fails spectacularly, requiring a massive $3.65 billion bailout by major banks and investment houses.
• 2000: NASDAQ Collapse. The “dot-com bubble” ends under the weight of excess valuations; the technology-heavy NASDAQ composite index loses more than two-thirds of its value.
• 2008: The Mortgage Crisis. A convergence of crises in housing, mortgage lending, credit ratings and risk management leads to closures of venerable institutions and prompts a sweeping $700 billion bailout.

NFJ’s Outlook

• Once the government’s Troubled Asset Relief Program (TARP) begins to clear bad assets, we expect the Fed to lower rates in 2009. With lower rates, higher inflation should be pushed off a little longer, at least through 2009-10.
• We expect the housing market to bottom sometime in mid-2009, and we believe the market will discount that about six months ahead of time. We could see the housing market move up in late 2009 or early 2010.
• Our research shows that, going back more than 100 years, the worst 10-year rolling-market returns in history were around 2.5%. The 10- year number ending in December 2008 should be around 2.5%, which could bode well for 2009. Of course, past trends are no guarantee of what will happen in the future.
• We believe that commodities, energy, materials and industrials are still a good place to be for the long term, as the supply/demand equation favors these areas.
• Sometime in the next two to three years, we expect inflation to become more evident.

NFJ’s Positioning

• Discipline trumps emotion no matter how good or bad markets are. At NFJ, we seek to add alpha by preserving capital in down markets and keep it when markets turn.
• We try to avoid bankruptcy risks in the portfolio by using our price momentum model, which acts like a stop loss.
• We continue to buy stocks that may be out of favor but have strong fundamentals at attractive valuation levels.
• We’ve underweighted financials across the board. Obviously there will be times when they rally, if they get oversold enough, but we have underweighted financials vs. our benchmark.

Thoughts for Investors

• The challenge for any investor longer term is to preserve real capital in the face of inflation. And to do that, we believe it’s better to hang in there, either by buying or at least not selling, because if you sell you won’t get back in. We believe that getting out of a position in real assets or equities at this point is the wrong thing to do, because you lose a set of assets that’s positioned to do well ultimately against fixed financial assets and especially against the dollar.
• Asset allocation has become more important. We used to believe that a 15%-20% allocation to international stocks was the proper allocation, but now prefer 40%-50% to protect against the falling dollar.
• Take the long-term view. Broaden your asset allocation and look for the best opportunities you can find. Some sectors and companies will do better than others, which is why we believe experienced asset managers who focus on balance sheets and help provide downside protection can really help you over time. That’s what we’ve always done at NFJ.