Sunday, March 23, 2008
Are We There Yet?
One of the most fascinating aspects of an economic downturn is to pinpoint the exact moment when the market bottoms out. This sweet spot is what savvy investors spend entire lives waiting for. This is when the most blue chip of stocks can be bought into at prices way below value, which likely won't happen again for at least a decade, or until the next business cycle brings another downturn. Are you willing to wait for another 10 years? Heck, at the rate that derivatives, complex financial instruments and hedge funds are falling apart, the 'markets', as we know them, may not even exist a decade from now.
So the time is between now and June 2008, for more reasons than one. First, the Fed is obviously willing to do anything to prevent a full scale meltdown and has decided to pull mortgage backed securities out of the markets and into the vaults of the NY Fed, which means the credit crunch is 'over' - Period. It also makes further extension of the mortgage crisis a bit unlikely. Secondly, the stimulus package rebate checks are about to hit the markets, which means a powerful jolt to consumer spending and market sentiment. To further stoke this sentiment, world markets seem to have come to the belated conclusion that a recession in the U.S. may not exactly be the kind of schadenfreude they had in mind - If you notice, the dollar has started rallying, commodities are falling, and Asia is gasping with blowback from reduced exports to the US. You can bet your boots that they'll be doing everything they can to keep US consumers in the stores.
So if you want to get in on the ground floor and get a free ride to a massive bull rally, dust off the charts and p/e calculators, take a quick look at what your favorite ETFs have been upto in the past week or so, and put in a call to your broker. You probably have until June before the herd enters the markets enmasse and the stock indexes zoom up into the stratosphere on speculative buying. A few guidelinies for making investments when the markets are scraping the bottom and revving up to make a recovery.
R.O.I. from Breet Arends, WSJ - Invest during a panic. Especially when it hits the front pages. Somehow, the system almost always seems to recover. Don't speculate. You're better off looking for securities that offer a more modest, but more predictable gain. Usually most investment returns come from picking the right sectors or types of assets, not from the individual stocks. Only invest for the long-term. That means five years or more. Look for mutual funds where the manager has a terrific long term record -- ideally 10 years or more.
Once-in-a-Blue-Moon Bargains from Aaron Pressman, Businessweek - The best way to play the junk-bond panic may be to buy shares of closed-end funds that specialize in high-yield debt. The subprime crisis has led to an incredible sell-off in municipal bonds, with yields topping those of taxable bonds, a rare occurrence that has preceded some of the biggest muni market rallies of the past 25 years. has led to an incredible sell-off in munis, with yields topping those of taxable bonds, a rare occurrence that has preceded some of the biggest muni market rallies of the past 25 years. Focus on REITs with solid holdings and good balance sheets. For those who prefer to invest through ETFs, Vanguard's $9 billion behemoth, the largest REIT ETF, is trading at about a 5% discount to its fair value, according to analysts at Chicago fund tracker Morningstar. There are promising opportunities in formerly high-flying tech stocks. Now the tech giants are trading at multiples of 15 to 20 times their earnings, which puts them at the low range of their respective five-year average price-earnings ratios. Many of the companies have little debt and are flush with cash, leaving them well positioned in a time of economic stress.
So, to sum it all up, the time is now. Don't try to time the market on something like commodities. Better to focus on the long run - Invest it and forget it, for 5 years at the minimum. Focus on ETFs in sectors which are stressed now, but don't have any fundamental problems, like munis and the tech sector (the tech sector does have problems, but they already had their crash, so the risks are lower compared to others). Derivatives being pimped by Wall Street investment firms are in for a tough time, with impending regulation and massively over-exposed risks, so I'd stay away from most Wall Street firms, even if they have shown massive gains in the past and are at historic lows right now. There's no value in them, and a lot of them won't survive beyond 2010. If you must buy individual stocks, stick to A-list companies like Microsoft, Visa, Wal-Mart and Nokia.
So the time is between now and June 2008, for more reasons than one. First, the Fed is obviously willing to do anything to prevent a full scale meltdown and has decided to pull mortgage backed securities out of the markets and into the vaults of the NY Fed, which means the credit crunch is 'over' - Period. It also makes further extension of the mortgage crisis a bit unlikely. Secondly, the stimulus package rebate checks are about to hit the markets, which means a powerful jolt to consumer spending and market sentiment. To further stoke this sentiment, world markets seem to have come to the belated conclusion that a recession in the U.S. may not exactly be the kind of schadenfreude they had in mind - If you notice, the dollar has started rallying, commodities are falling, and Asia is gasping with blowback from reduced exports to the US. You can bet your boots that they'll be doing everything they can to keep US consumers in the stores.
So if you want to get in on the ground floor and get a free ride to a massive bull rally, dust off the charts and p/e calculators, take a quick look at what your favorite ETFs have been upto in the past week or so, and put in a call to your broker. You probably have until June before the herd enters the markets enmasse and the stock indexes zoom up into the stratosphere on speculative buying. A few guidelinies for making investments when the markets are scraping the bottom and revving up to make a recovery.
R.O.I. from Breet Arends, WSJ - Invest during a panic. Especially when it hits the front pages. Somehow, the system almost always seems to recover. Don't speculate. You're better off looking for securities that offer a more modest, but more predictable gain. Usually most investment returns come from picking the right sectors or types of assets, not from the individual stocks. Only invest for the long-term. That means five years or more. Look for mutual funds where the manager has a terrific long term record -- ideally 10 years or more.
Once-in-a-Blue-Moon Bargains from Aaron Pressman, Businessweek - The best way to play the junk-bond panic may be to buy shares of closed-end funds that specialize in high-yield debt. The subprime crisis has led to an incredible sell-off in municipal bonds, with yields topping those of taxable bonds, a rare occurrence that has preceded some of the biggest muni market rallies of the past 25 years. has led to an incredible sell-off in munis, with yields topping those of taxable bonds, a rare occurrence that has preceded some of the biggest muni market rallies of the past 25 years. Focus on REITs with solid holdings and good balance sheets. For those who prefer to invest through ETFs, Vanguard's $9 billion behemoth, the largest REIT ETF, is trading at about a 5% discount to its fair value, according to analysts at Chicago fund tracker Morningstar. There are promising opportunities in formerly high-flying tech stocks. Now the tech giants are trading at multiples of 15 to 20 times their earnings, which puts them at the low range of their respective five-year average price-earnings ratios. Many of the companies have little debt and are flush with cash, leaving them well positioned in a time of economic stress.
So, to sum it all up, the time is now. Don't try to time the market on something like commodities. Better to focus on the long run - Invest it and forget it, for 5 years at the minimum. Focus on ETFs in sectors which are stressed now, but don't have any fundamental problems, like munis and the tech sector (the tech sector does have problems, but they already had their crash, so the risks are lower compared to others). Derivatives being pimped by Wall Street investment firms are in for a tough time, with impending regulation and massively over-exposed risks, so I'd stay away from most Wall Street firms, even if they have shown massive gains in the past and are at historic lows right now. There's no value in them, and a lot of them won't survive beyond 2010. If you must buy individual stocks, stick to A-list companies like Microsoft, Visa, Wal-Mart and Nokia.
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