THE ENTERPRISE
Note: The serious part is at the beginning, and the "not-so-serious" part is at the end of this edition.
IS THIS THE START OF A FINANCIAL MELTDOWN AND RECESSION?
Most of the sources I know and read say "NO." The best advice is "Don't panic." Posted below are some snippets from my sources. First, 3 points that nearly everyone agrees on:
1) Don't "count your money" and calculate how far you are down from the peak. You'll always find some peak that you are "down from." Take the long view.
2) Don't panic--unless you have to sell, don't. Only sell if you can sell on an uptick and convert some stock holdings to cash, but this is a dicey proposition--market timers seldom win--because they can't decide when to buy back in with the cash they took out.
3) Look at fundamentals and judge whether this is rational market behavior, or an irrational reaction to a series of unsettling events, and investors that were taking too much risk, using too much leverage.
A retired friend that was a very high-level executive at Merrill Lynch in his pre-retirement days.
Still a sharp, incisive thinker who understands these areas far better than I do. He says:
"The good news is that inflation is low, interest rates are low, earnings are ok and GDP should only be effected modestly from the credit crunch. The inverted yield curve 6 months or more ago signaled a possible recession in the later part of '07 going into '08. The market is discounting that possibility and we will be in for a possible downturn but not a collapse. The other positive is that the P/E multiple on the S&P 500 is only 15X which makes the stocks relatively cheap but they will get even cheaper.
He wrote this 8/15...so the Fed decided to "jump the gun" and head off recession concerns.
"The Fed will lower the discount rate by 50 basis points when it's afraid we are heading for a recession, which will calm things down a bit—but in the end the market will need to create its bottom through very hectic market swings. Those who are in there for the long term will just ride it out. There will be a number of unsettling times ahead. Even though the Fed is pumping money into the system the banks are not willing to use that money (allow the public to use that money) due to the risks the banks see. A drop in the discount rate of 50 basis points should create a more viable environment for the banks to start lending money again."He continues to explain:
"One of the areas where a lot of selling is taking place is due to margin calls. Because the markets had been on such a great winning streak there are many out there who are highly leveraged. The same is true with the housing market. There will be a short term bounce because of the oversold nature of the stock market and one might use that rally to possibly raise a bit of cash if your portfolio is heavily tilted toward stocks (meaning over 80%). The cash will do two things. It will ease your tendency to panic and it will enable you to use those dollars when the market turns around for the next big upward move—and there will be a number of upward moves in the future."
Tobin Smith of ChangeWave
On Fox News, as an expert analyst Tobin Smith agreed: "Don't panic." "Stay in the market; take the long view. Unless you have to sell now for some emergency reason, sit tight."
James Stewart in The Wall Street Journal
Headline says: "Despite the recent bumps, now's not the time to panic." He continues, "It's time for all of us to take a deep breath." (You can read the rest, if you want, in the August 15 edition of the WSJ, p. D5.)
A good source I've been using for several years, to help me with Asset Allocation. (Dan Weiner)
"Here's why you should remain calm, cool and collected as the storms swirl around Wall Street. First, great wealth is built in the stock markets over time. It's "time in the markets," not "market timing" that will see us to a brighter financial future. When stock markets are going up, lots of investors say, "Yeah, yeah," when I mention sticking with our investment strategies. It's easy to stay in the market when it's rising ˜ who wouldn't go for that? But when markets fall, the quick response is to say, "I want out." The problem, as I've mentioned many times, is that you may pull out of the market before it tumbles further, or you may pull out just before it begins rising again ˜ but who's going to tell you when to buy back in? I've been managing money and writing to you about managing your money since 1991 and was covering Wall Street's machinations in the early '80s, and I can tell you that I've never met a successful market timer that got two calls right. One, yes. Two? Never.
What's making people fearful is that, once again, they're counting their losses from their portfolio highs ˜ the highest level they attained in July when the markets last peaked. This is an artificial, and really, a destructive way to look at performance because unless you're hitting new highs every day, you'll always see a loss from the peak.
From a Newsletter I have found to be insightful (Gary Halbert's)
"The last several weeks have been a tumultuous time in the equity markets, both in the US and abroad. Despite some surprisingly good economic and inflation news, the equity markets have been spooked by the sub-prime mortgage debacle, which has now led to a mini-credit crunch and more hedge fund blow-ups. As a result, we are now in a liquidity squeeze. Hedge funds, institutional players and individual investors have been selling stocks with abandon, especially over the last two weeks.
While the problems with sub-prime mortgages and related loan defaults are large, they are reasonably identifiable in terms of potential size. The greater problem on Wall Street seems to be that investors don't know where the next blow-up will be and/or whether the sub-prime debacle will seriously threaten the prime mortgage lenders and the big money center banks. As a result, investors have been flocking to the sidelines.
Making matters worse, the Japanese yen has continued to be relatively strong so far this month, and that is causing some hedge funds and large investors around the world to unwind their various so-called "yen carry trades." It is unknown just how much money is still in these carry trades, but it is believed to be huge and this, too, is adding pressure in both the currency markets and the credit markets.
The combination of the sub-prime and related mortgage dilemma, the credit crunch, plunging equity markets and unwinding of the yen carry trade was referred to by some analysts and traders as "the perfect storm," in that losses in the last several weeks have been huge for many market participants.
The liquidity squeeze reached a point last week at which the Fed and central banks around the world stepped in and injected massive amounts of liquidity into the system to stave off what looked to be a potential financial market meltdown. It remains to be seen if this large liquidity infusion will be enough for the credit markets to relax and stabilize, or if the central banks will have to inject even more credit into the system, or lower interest rates.
The big question, of course, is whether the latest plunge in the equity markets is just the much- anticipated "correction" we have been looking for, or whether the credit crunch continues and sends equities into a bear market. BCA continues to believe it's the former and not the latter. I will share BCA's latest thinking with you below:"
PER BANK CREDIT ANALYST: Stocks Make New Record Highs, Then Plummet
Over the last six weeks, we've seen yet another gut-wrenching roller coaster in the equity markets. Following a brief setback in late June, the DJIA soared to a new milestone at 14,000 in mid-July. More importantly, the much broader S&P 500 Index finally managed to reach a new all-time high above 1,550. Investors, traders and market analysts were jubilant.
But in the last full week of July, stocks got hammered with the Dow and the S&P 500 losing over 4% in just one week. This weakness came despite some of the best economic news we've seen all year. 2Q Gross Domestic Product surged by 3.4% (annual rate), well above most pre-report estimates. And the inflation figures in that same GDP report indicated that core inflation was finally down to near the Fed's supposed comfort zone. Analysts agreed this meant no more interest rate hikes.
Good news of this magnitude should have sent stocks soaring - it didn't. In fact, just the opposite occurred. Stocks have continued to fall. As we all know now, the latest plunge in stock prices is primarily due to the continuing sub-prime and related mortgage debacle which has resulted in a credit crunch. Institutional players, hedge funds of many sizes and shapes, and even individual investors were selling with abandon last week, and it remains to be seen how long this lasts.
The S&P 500 and the Dow have now fallen into an area where there should be good intermediate support based on technical analysis. My best guess is that the major equity markets will stabilize over the next week or so - assuming this is just a correction as I have suggested over the last several weeks. But of course there is always the chance the markets could blow out intermediate support levels and test the long-term support levels. I tend to doubt this for reasons I will outline below, but here is the long-term chart of the S&P 500, which puts the latest sell-off in perspective (ie - it hasn't been all that bad).
So, if we have some fairly reasonable estimates regarding how bad the losses may be, then why is there such panic selling? It may be fair to assume that market players, both large and small and in between, don't trust the estimates. But even if the estimates were twice as big, we are not likely looking at a financial crisis that would send the economy into a deep recession or worse.
The problem as I see it is that investors across the spectrum are tired of surprises. They don't know who might be next on the list to fail or have serious problems. Last week, we learned that one of France's largest money center banks, BNP Paribus, froze withdrawals from three of its large hedge funds with (apparently) significant exposure to the US sub-prime mortgage markets. So the sub-prime contagion has spread beyond our borders, but it is hardly a worldwide catastrophe that is going to shut down the global economic boom, or doom the equity markets to a prolonged bear market.
:-D
Now that you have read the serious stuff, here are a couple of things to make you grin. Two sets of rules to live by: one written by women, one written by men. Apply them at your own risk! One story about easing into semi-retirement and having a little fun.
THE RULES
*****************************************
1. The female always makes the rules.
2. The rules are subject to change at any time without prior notification.
3. No male can possibly know all the rules.
4. If the female suspects the male knows all the rules, she must immediately change some or all of the rules.
5. The female is never wrong.
6. If the female is wrong, it is due to a misunderstanding, which was a direct result of something the male did or said wrong.
7. If rule 6. applies the male must apologize immediately for causing the misunderstanding.
8. The female may change her mind at any time.
9. The male must never change his mind without the expressed written consent of the female.
10. The female has the right to be angry and upset at any time.
11. The male must remain calm at all times, unless the female wants him to be angry and upset.
12. The female must, under no circumstances, let the male know whether or not she wants him to be angry or upset.
13. The male is expected to mind read at all times.
14. If the female has P.M.S., all the rules are null and void.
15. The female is ready when she is ready.
16. The male must be ready at all times.
-------------------------
The Man Rules (At last a guy has taken the time to write this all down )
Finally, the guys' side of the story. We always hear "the rules from the female side. Now here are the rules from the male side. These are our rules! Please note these are all numbered "1 " ON PURPOSE!
1. Men are NOT mind readers.
1. Learn to work the toilet seat. You're a big girl. If it's up, put it down. We need it up, you need it down. You don't hear us complaining about you leaving it down.
1. Sunday sports-It's like the full moon or the changing of the tides. Let it be.
1. Crying is blackmail.
1. Ask for what you want. Let us be clear on this one: Subtle hints do not work! Strong hints do not work! Obvious hints do not work! Just say it!
1. Yes and No are perfectly acceptable answers to almost every question.
1. Come to us with a problem only if you want help solving it. That's what we do. Sympathy is what your girlfriends are for.
1. Anything we said 6 months ago is inadmissible in an argument. In fact, all comments become Null and void after 7 Days.
1. If you think you're fat, you probably are. Don't ask us.
1. If something we said can be interpreted two ways and one of the ways makes you sad or angry, we meant the other one
1. You can either ask us to do something, or tell us how you want it done. Not both. If you already know best how to do it, just do it yourself.
1. Whenever possible, Please say whatever you have to say during commercials.
1. Christopher Columbus did NOT need directions and neither do we.
1. ALL men see in only 16 colors, like Windows default settings. Peach, for example, is a fruit, not a color. Pumpkin is also fruit. We have no idea what mauve is.
1. If it itches, it will be scratched. We do that.
1. If we ask what is wrong and you say "nothing," We will act like nothing's wrong.
We know you are lying, but it is just not worth the hassle.
1. If you ask a question you don't want an answer to, expect an answer you don't want to hear.
1. When we have to go somewhere, absolutely anything you wear is fine... Really.
1. Don't ask us what we're thinking about unless you are prepared to discuss such topics as baseball or golf.
1. You have enough clothes.
1. You have too many shoes.
1. I am in shape. Round IS a shape!
Yes, I know, I have to sleep on the couch tonight; but did you know men really don't mind that? It's like camping.
----------------------------------
Finally...just one more...
People frequently ask me what I do to make my days interesting now that I'm semi-retired.
The other day I went downtown and went into a shop. I was only in there for about 5 minutes. When I came out there was a cop writing out a parking ticket. I went up to him and said, "Come on, man, how about giving a retired person a break"?
He ignored me and continued writing the ticket. I called him a "Nazi." He glared at me and started writing another ticket for having worn tires. So I called him a "doughnut eating Gestapo." He finished the second ticket and put it on the windshield with the first.
Then he started writing a third ticket. This went on for about 20 minutes. The more I abused him, the more tickets he wrote. Personally, I didn't care. I walked downtown.
The car that he was putting the tickets on had a bumper sticker that said "HILLARY IN '08." I try to have a little fun each day. It's important to my health.
OK...that is all for this SPECIAL EDITION. No rants, no raves, just a little politics.
I HOPE YOU FIND IT EITHER USEFUL, OR FUNNY, OR BOTH!
Best, John
Comments