Tuesday, September 23, 2008

Trading in a Turbulent Week

Our clients know that our strategy ordinarily does not involve short-term trading, but last week was a notable exception.

Goldman Sachs (GS), which in our judgment is the premier investment bank (now commercial bank) in the world, fell sharply last week and by Wednesday was trading at its book value of just over $100 per share. This was such an unusual circumstance that we felt we should take advantage of it to average down our cost basis in this core holding. We bought the stock at 108 on Wednesday, which had the effect of significantly lowering our average cost.

As the week went on and the entire financial system literally began to fail, the U.S. Treasury announced, on Thursday night, its plans to initiate a huge purchase of the toxic mortgage-backed debt that had frozen the system. On Friday, financial stocks rallied strongly on the news, and that enabled us to lock-in a 21 point (19%) gain on the GS position we had just taken. We decided that taking this gain was prudent in the face of the turbulence of the market. We also took additional gains in U.S. Bank (USB), which, despite the fact that it is one of our favorites, had gotten well ahead of its valuation on Friday, in the euphoria following the Treasury announcement.

In combination with other actions we have taken over the last few weeks, these moves have enabled us to protect a significant amount of client capital, which we believe is prudent, given the seriousness of the situation. All of this cash is invested in a U.S. Treasury fund; not quite under the mattress, but close to it.

We have continued to outperform the market, year-to-date, and we intend to keep it that way.

If there are any questions about our strategic moves, we will be pleased to respond.

Jack and Peter Falker

Note: Both Jack and Peter Falker and the clients of FalkerInvestments Inc. are long both GS and USB

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