The past few months have seen some of the most extraordinary events in world financial markets that have elicited even more extraordinary responses from world governments, which may turn out to be a defining point of three generations (Baby Boomers, Gen X and Y). The subprime debts that started as a ripple last year have turned into a tidal wave that has engulfed some of the biggest banks and investment houses in the world. In the week beginning September 15, we saw Lehman Brothers fall; Merrill Lynch sold at a heavily discounted price and an $85b
lifeline was thrown to AIG, the largest insurance company in the world. This tumultuous week ended with the announcement of a ‘bailout plan’. However, this did not turn out to be the turning point that everyone was hoping for.

With markets falling, the British banking system under siege and in Iceland the real possibility of the country going bankrupt, the situation looked very bleak. With things appearing to get worse by the day, a coordinated response from world governments began to emerge. Unprecedented levels of government support for financial institutions were pledged and interest rates were slashed worldwide in an apparent coordinated effort.

This still was not enough and on Friday October 10 2008 the Australian Share Market fell 8 percent, its biggest one day loss
since October 1987. With the financial system on the brink of collapse world governments finally began to work in concert together and we saw guaranteeing of bank deposits, underwriting of interbank loans and direct investments into failing banks.

In light of these extraordinary times, we have prepared a special edition of our regular newsletter dedicated to the current events, in order to try and provide you with some insight into where we have come from, where we are now and where we are going.

Whilst the events on world markets have captured our attention, they have also distracted us from our day to day lives. Whilst growth has slowed and prospects are not as bright as they were 12 months or two years ago, for the majority of us we continue to go to work, pay bills, buy groceries and generally spend our money (and some of us have a little more now, thanks to Mr Rudd’s $10.4bn package). These activities underpin the overall economy and ultimately contribute to the prosperity of the companies listed on share markets.

A well known fund manager recently highlighted four rules for investing for the long term.
• take comfort from history, the long term trend is up
• stick to your original plan
• don’t overreact to short term market movements
• diversify your investments to spread risk

We hope this newsletter helps explain a little about the current situation and assists in your understanding of the reasons that have led us to this position.

Daniel Minihan
Director
dminihan@moorestephens.com.au