Over the past two days, questions have been raised regarding the safety of client assets held at various custodial firms. Lehman Brothers and some of the other large investment banks have been pushed onto or over the brink of bankruptcy due to losses from speculative securities that were held on their balance sheets. However, it is important to be aware that client accounts at these brokerage firms are protected from the adverse effects of bankruptcy since the value of client brokerage accounts are never part of a brokerage firm’s balance sheet.
In addition, the custodians that Heritage uses (Charles Schwab Institutional, Fidelity, TD Ameritrade and Pershing) are not involved in the riskier activities that have damaged the large investment banks. Our custodians are primarily transactional traders (as opposed to proprietary traders like Lehman and Bear Stearns), and they all continue to have strong balance sheets as a result. We therefore remain highly confident in both the stability of our custodians and the access that our clients have to their assets.
The recent market turmoil has been caused by the deteriorating housing market and reckless lending behavior on the part of the global investment banks. These banks are holding large portfolios of real estate loans whose value is difficult to ascertain due to the decline in home prices. The uncertainty surrounding the value of these securities has caused the markets to lose faith in the solvency of some of the largest investment banks, and this has had global repercussions.
On a positive note, the commodities prices which were rising so rapidly and producing increased inflation, have pulled back in adjustment to a slowing economy. The price of oil, which stood at almost $150/barrel two months ago, has declined to $91/barrel. Currently the credit market conditions are outweighing the benefits of slowing inflation, but lower commodity prices will ultimately be a positive when a recovery occurs.
Our approach to investing is based upon a belief that the capital markets will work through their problems and deliver positive returns over the long term. Unfortunately, we are in the midst of a bear market. At the current time, the length and magnitude of this bear market is within the normal historical range, but the constant barrage of negative news makes it feel unprecedented. We do not know what the immediate future holds, but we are confident that the capital markets will work through these problems and return to normalcy once the banks and housing market get on firmer footing.
We realize this is a difficult time. However, downturns are a reality of the capitalist system and patience is necessary. We all know that investments do not go up forever, but in times like these it is critical to remember that they do not decline forever either.
Please call us at any time to discuss your account.
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