The third quarter is drawing to a close and almost everyone in stocks lost money.  European stocks had some of their biggest losses of the past 15 years led by Europe’s largest economy, Germany.  The German DAX lost 32%, the largest since its introduction in 1987.  The U.K.’s FTSE 100 fell 17% for its largest loss since 1987.  France’s CAC 40 fell 24%.  Japan’s Nikkei 225 Stock Average declined 12% and reached a 19-year low during the third quarter.  Hong Kong, South Korea and Taiwan all lost as much as 10%.  Contrary to the trend, Pakistan rose 16% in response to U.S. economic sanctions being lifted.  In Latin America, Argentina gained 13%, but Brazil declined 38%, the world’s worst performance for the third quarter.  At home, the S&P 500 lost 14%, falling to a 4-year low and the NASDAQ fell 16.4% to a six-year low. 

Every year, for the past 20, a group of about 30 faithful Christ Church parishioners go into the hills of West Virginia on a trip to renovate, re-roof, re-floor, re-found, re-wire, and add bathrooms where there were none; but mostly they go to restore the hope that people care.  McDowell County in the southeastern hill country of West Virginia, north of Bluefield, was one of the state’s richest coalfields. 

You know from your July and August statements just how badly the markets mistreated long-term investors.  A few statistics from Credit Suisse First Boston help put the period into even better perspective.  A record $29 billion was removed from mutual funds in July 2002.  Stock funds experienced record outflows, while bond funds enjoyed record inflows.  Net outflows from equity funds in July 2002 were almost twice as large as those during September 2001, and more than five times larger than those during August 1998.  Every style of equity funds was affected by investors’ withdrawals in July. 

What have we lost since September 11th?  We are all infinitely more aware of just how quickly thousands of people can die at the hands of terrorist murderers.  On that horrible day, the lives of three thousand fathers, mothers, husbands, wives, and children were abruptly and tragically ended.  We all watched it in living horror.  During the past year, with that knowledge we readily sacrificed some of our cherished freedoms.  We continue to debate how many more liberties we will yield in the name of domestic security, but we have already given up much.

Have we seen the bottom or are we in for another cruel joke from old Mr. Market?  As you know, the market is random in the short term, and this bear has lived up to that reputation.  But, there are a lot of signs that point to an improved investment climate in the coming months. 

By the time you read this Brief, I will be in the ‘Mecca of Elvis,’ Memphis, Tennessee, along with 70 to 100,000 faithful pilgrims.  In the unlikely event you haven’t heard, the twenty-fifth anniversary of the King’s death is today.  It just happens to coincide with my taking my second daughter Emily, to school at Ole Miss.  The University of Mississippi lies in the quaint town of Oxford, Mississippi, one hour south of Memphis.  As it is difficult to fly to Oxford, Memphis is the gateway by air.  But even Memphis may become a tougher destination for Elvis pilgrims and Ole Miss students if the current descent of commercial aviation continues. 

July was the worst month for the S&P 500 since September 2001.  Few stocks were spared abuse.  Most of the best performers were stocks bouncing off oversold bottoms as telecommunications and technology stocks were among the leaders.  As mentioned in last weeks’ Brief, short covering accounted for most of the gains in stocks.  Lately, though, market specialists say they are seeing some real buying.  It may be due to money managers re-balancing their portfolios towards equities as bonds have become over-weighted during the past couple of years. 

Optimism is a wonderful trait, and we Americans seem to own the rights to it.  We are born with it in vast supply and our unique culture richly nourishes it.  Entrepreneurs, CEO’s, investors, and stock analysts are poster children of American optimism.  Problem is, it got out of hand in the late 90’s and we must now pay the price, as economic and company results fall relentlessly short of expectations.  In truth, the results aren’t really quite so bad as they seem; it’s our expectations that are too high. 

What did Wednesday’s 500-point rally mean?  Event the bears can’t ignore the largest gain in 15 years - some discussion is warranted.  Was it the bottom of a long decline, was it a reflex action, did it mean anything at all?  One of my favorite writers, Caroline Baum of Bloomberg put it this way:  “a) the two houses of Congress agreed on a bill to overhaul existing securities and accounting laws; b) the sight of Adelphia Communications' John Rigas and his two sons being led away in handcuffs reassured investors the government is getting tough on white-collar crime; c) sellers took the day off; d) after a month of losses making July 2002 resemble October 1929, even the deadest cat can bounce; e) all of the above; f) none of the above.” 

Think back to March of 2000 and you might recall those strong the public statements that were bandied about by the government’s Microsoft trustbusters.  Their tone of retribution was the impetus, in the opinion of many, that launched the first phase of the ‘great bear market of 2000 to 200?.’  The question that keeps me awake at night is this; could the bear be prolonged indefinitely as our congress and administration posture to ‘reform’ securities laws, and in so doing, drive away investors and CEOs who fear that the new regulations will be too restrictive to promote effective capital formation or excessive penalties?  It is plausible that the markets are not so worried that every company is crooked as they are that Washington will overreach in addressing a problem that is not as widespread the big-government proponents would have us believe.