A Chill in the Air (Don’t Worry, Chillax!)

I woke up yesterday morning and for the first time, grabbed a scarf before heading out into a crisp New England morning. There was a real chill in the air and I guessed that I would need to wrap myself in a cocoon of warmth. As the day progressed, it was clear that a cool blast was sweeping through Wall Street and by the end of the day investors would need to seek comfort in their respective scarves.

Like a new season that you know is coming, but still catches you by surprise, yesterday’s market action was painful, though not shocking. We had been feeling the cool winds over the past couple of weeks, in the form of more bad news from financial institutions about subprime losses. Although we were warned of the new weather pattern, now that it is here, investors are feeling chilled to their bones.

As banks attempt to quantify the billions of dollars of losses tied to mortgage-related securities, there were hints of more credit headaches yesterday. Stocks started the day weak, but selling accelerated around midday, and major benchmarks finished near their lows for the session. The Dow Jones Industrial Average tumbled 360.92 points to 13300.02, wiping out all the gains since the Fed's first rate cut September 18. The S&P 500 sagged 44.65 points to 1475.62, while the Nasdaq Composite Index shed 76.42 points to slide to 2748.76.

And like the weather professionals who can’t help talk about the first chill or snow storm, the analysts were coming out of the woodworks to do the play-by-play of this event. Ratings agency Moody's downgraded about $36 billion of debt securities held in structured investment vehicles (if you’re like me, you might be wondering where the ratings agencies were when we needed them—when the initial ratings were determined for these securities!) and others were guesstimating that when the dust settles from this credit crisis, there will be over $100 billion in write-downs on the illiquid, difficult-to-value holdings.

Before you get crazy about the weather (what are we, Brits?), don’t forget that you probably have a delicious scarf in your investment closet---it maybe those “boring” short-term government bonds or the classic black cashmere, also known as the money market account, or maybe the exotic and colorful commodities position. Any of these might provide some comfort as everyone else is frozen with fear. In the words of my nephew, this is not an occasion to be chilled by fear; rather diversified investors can “chillax”.