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By Eliza Ridgeway
Shock waves from the financial turmoil gripping the nation have reverberated in the Los Altos area, as residents, local agencies and business owners try to predict what the market meltdown portends for their bottom line.
The Federal Reserve announced plans to expand credit to major national banks, and last week Congress passed a $700 billion financial-rescue package, the Emergency Economic Stabilization Act of 2008. But these moves – intended to rebuild faith in the American financial system and ease a liquidity crisis that has toppled banks – are difficult to understand even for area financial experts, leaving many unknowns for residents faced with the specter of tight times.
Joel Shaps, a Los Altos resident and president of Los Altos-based Bedrock Capital Management, said many clients requested an interpretation of the national financial events. He thought the bailout was necessary because of the liquidity crisis in the nation’s markets.
“The metaphor I give my clients is that liquidity – the ability to lend and borrow money – is kind of like the motor oil in your car,” he said. “It won’t run on it, but if you don’t have oil in your engine, it won’t run at all.”
At the Town Crier’s press deadline Monday, the financial markets had continued to drop, both in the U.S. and abroad. The Town Crier “50” stock index – stocks representing companies whose executives live within the city – offers a localized snapshot of the stock decline. Apple Inc., for instance, started the year at $195 per share. It was listed at $97 as of last Friday. Even high-flying Google has gone from $685 a share at the first of the year to $386 as of Friday. On the other hand, some entries in the Town Crier “50” continue to profit. Coherent Inc. was up $36.18 since the beginning of the year. Iridex Corp. was up $40.56.
Local retailers hesitate to make dire predictions about sales this year, but many acknowledge that uncertainties about the country’s financial future lead to anxious times for small-business owners and customers alike.
James Maltby, proprietor of Maltby’s Restaurant & Tavern downtown, said it seemed business was down for many in the restaurant industry, but he noted that August and September are traditionally slow months for his eatery.
“People are being price conscious more these days than they have been in the past,” he said, which spurred his “buy one, get one free” specials on weeknights.
Linda Janes, owner of the Janus and Cooks’ Junction stores on Main Street, said business appears to have slowed down to a certain extent and acknowledged that, “as the stock market goes up and down, it has people worried.”
She said it was natural for consumers to react to the turbulence with fear, but she, like Maltby, is looking for ways to work with the current mood and adapt to the situation.
“(We) just had a customer-appreciation sale with higher sales than last year,” she said, noting she is trying to counteract the potential chilling effect on business by increasing her store’s visibility and the duration of her sales.
Local government agencies feel some crunch as well, but Los Altos and Los Altos Hills city staff and committee members offer a cautiously optimistic prognosis for municipal investments.
Stanley Mok, vice chairman of the Los Altos Hills Finance Committee, said the town’s finances are sound and that although debt instruments issued by Fannie Mae and Freddie Mac were included in the town’s portfolio, when those institutions failed, the federal government backed them, securing the town’s investment.
Los Altos Hills Finance Director Nick Pegueros said the town’s portfolio dropped from a 4.785 rate of return in August 2007 to a 2.727 percent rate in August 2008, the last month for which figures are available.
“Cities and municipalities are greatly restricted in what they can invest in – they have to be ultraconservative,” Los Altos Hills Finance Committee member Frank Lloyd said.
Lloyd said he thought the economy was experiencing an overly pessimistic drop and would rebound.
“I’m sitting on a lot of cash and CDs, (and) my stocks are down, but I’m not selling,” he said. “Eventually things will bottom out and that will be the time to take my cash out and invest it.”
Mok said that for his own company, Mok Capital Management, “I thought we were going into a deep recession or a depression. I made sure that we had all triple-A-rated paper.”
Because he had made pessimistic predictions on the nation’s financial performance over the last two years, Mok said his company’s investments do not reflect the overall downward trend.
“The market is down 712 points currently, (yet) on each $100,000 account that I have today, they are actually up $400.”
Los Altos City Manager Doug Schmitz reported that the city’s investments are part of a local agency investment fund, a state investment pool for public agencies. He described the city’s portfolio as “very safe” but noted there had been a significant drop-off in yield. The portfolio yielded a 5.25 percent rate of return in August 2007, compared with a 2.78 percent in August 2008, the last month for which Schmitz had figures.
“There’s been a significant drop-off there,” he acknowledged, adding that the city was also tracking changes such as a possible drop in retail sales, which might impact the city’s tax revenue.
Because financial institutions are expected to have less money to lend and to be more cautious about doing so in the near future, a credit crunch is anticipated for individual residents, business owners and the city.
“One of the big impacts, from what we’re reading, is municipalities and counties and states have a difficult time selling bonds,” Schmitz said. “We’re expecting bond rates will be going up (and evaluating) what impact it will have on the city when it decides to go out for bonds for the community center.”
Shaps said he observes that people are holding more of their assets in cash, but advises against an overreaction to recent events.
“We don’t want them to panic, we don’t want them to overreact out of fear or greed – there’s a big buying opportunity if you have a lot of cash on the sidelines. (Warren) Buffett is investing billions; he’s buying some of these companies that are distressed,” he said.
“We’ve always advised our clients that any money they might need to use in the short term, meaning five years or less, they really shouldn’t be exposing to market fluctuations. But by the same token, we think there’s probably an opportunity here once this recession subsides – historically markets have rebounded quite robustly after recessions. In 1974 the market bottomed out and then rebounded 42 percent.”
Traci Newell and Bruce Barton contributed to this story. Contact Eliza Ridgeway at
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