Sponsored Link:
3 Steps You Can Take To Combat The Current Stock Market Collapse
The Smart Profits Report
Tuesday, October 7, 2008: Issue #564
by Aaron Lehmann, Contributing Editor, Smart Profits Report
To say the least, it’s been an incredible year for the financial world and the stock market. And we’ve still got another 12 weeks left before we hit 2009.
In less than six months, the list of financial catastrophes reads like one that could cover an entire decade instead…
- Two leading investment banks (Bear Stearns and Lehman Brothers) have become extinct.
- The federal government has stepped in to save Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE) and American International Group (NYSE: AIG), the largest insurer in the world.
- Bank of America (NYSE: BAC) has acquired Merrill Lynch (NYSE: MER), the largest brokerage firm.
- Wells Fargo (NYSE: WFC) has snatched Wachovia Corp (NYSE: WB) from under the nose of Citigroup (NYSE: C) and is set to grab 75-80% of Wachovia’s deposits, versus 20-25% for Citigroup, according to Reuters. Many other banks have gone broke and more than 115 are on the FDIC watchlist.
- With the financial system at breaking point, the federal government approved a $700 billion bailout package.
With global economic conditions in total shambles, the Dow Jones Industrials, S&P 500, and Nasdaq Composite are only down 27.6%, 30.4%, and 32.6% for the year, respectively.
I say “only” because of the significant damage that many sectors have endured - from financials, to tech stocks, and most blue chip firms.
So let’s see what got us into this ugly state of affairs - the worst investment climate in a generation - and what the future may hold in store…
From The 1960s To Today… Presidential Policies Trigger Problems
The roots of the Stock Market Collapse go back a long way. Whether it was Lyndon Johnson’s pervasive policies of the 1960s, or Ronald Reagan’s tough stance against Jimmy Carter’s liberal policies, the U.S. arguably lost its way by having citizens believe that everyone has the right to own a home and that it’s okay to spend beyond your means - the latter of which can send them spinning into serious financial jeopardy.
Meanwhile, greedy creative financiers, who provided the products and services that gave the public what they wanted only fanned the fires that were already brewing.
And since 1988, the policies of George Bush I, Bill Clinton, and George Bush II have only exacerbated the situation and created the now infamous sub-prime mortgage problems that have led to the downfall of many financial institutions.
I’ll give you a personal example of how the financial market has become clogged…
The Runaway Hedge Fund Industry… From Growth Explosion To Market Meltdown
When I was active in the hedge fund industry in the early and mid 1990’s, there were fewer than a couple of hundred funds.
Since then, however, the industry has swelled enormously - and now contains more than 10,000 funds.
And such huge growth in numbers has resulted in equally massive growth in assets, mushrooming from $500 billion to $2 trillion.
Even when I was in the market, it was extremely difficult finding the portfolio managers, analysts, traders, and others, who could manage and run a successful hedge fund that investors were willing to pay a premium for superior performance.
So it stands to reason that with all the newcomers in the market, there are even more who are unable to achieve this and are wilting under the pressure of a severe market downturn.
Don’t get me wrong… most hedge fund managers are very bright. But they simply lack the experience of seasoned veterans. And we can attribute much of the stock market’s recent weakness to the enforced selloff of stocks from fund partners and the lack of buyers in the market. It then becomes a vicious, self-perpetuating cycle, born from fear and a crisis of confidence (as Richard Fuld, CEO of the now-bankrupt Lehman Brothers firm testified before Congress yesterday).
How the heck do you invest in an environment like this?
The Analytical “Double Play” That You Should Be Using For Your Investing
Simply put, fundamental analysis should be at the root of any investment decision. Combined with technical analysis and the current price of an asset, investors should then be able to make informed, intelligent decisions.
However, during severe market corrections, rational thinking gives way to psychology and perception. Or put another way… fear and greed.
Consequently, since this isn’t accurately quantifiable, making predictions becomes much tougher. Nevertheless, that’s our business! So while I confess that I don’t yet see a real bottom in the near-term, the market is deeply oversold, which suggests that we could get a significant rally at any time. However, that could occur from a much lower level first.
And if you’re thinking the recently passed bailout package will smooth the troubled waters… not so fast…
Bailouts And Ballots
The federal government’s “bailout” is merely a patchwork attempt to stop the hemorrhaging. In truth, the well-documented problems still exist - except nobody knows for sure just how deep and widespread the problems are within the system.
What is obvious, though, is that with over $150 trillion in derivatives, troublesome commercial loans, and consumers up to their eyeballs in debt (and tapped out), hundreds of banks worldwide are on the verge of going out of business. And even those financial institutions that aren’t in imminent danger certainly face a precarious future.
On top of that, foreclosures, layoffs, inflation and deflation are all present in different areas, which only exacerbates an already bad situation.
With the U.S. presidential Election Day less than a month away, neither candidate seems sufficiently versed in handling complex issues and must instead rely on their respective advisors.
But with an unsuccessful Democratic Congress over the past 18 months, in addition to an equally ineffective Republican White House, Americans could be forgiven for losing hope. Alas, playing politics with people’s futures always seems to triumph over doing the “right thing.”
Investment Light At The End Of A Dark Tunnel
I realize I’ve painted a pretty bleak picture here. But there’s little point in sugarcoating things: The climate is bleak.
The question is: How do we handle it?
My advice is this:
- The equity portion should be invested in solid stocks that are defensive in nature and which pay a dividend. This should only represent about 10% of your investment portfolio or assets.
- Make sure a portion of your assets is in high-quality municipal bonds (depending on your tax bracket).
- Allocate a sizeable portion of your assets to U.S. Treasuries, U.S. Money Market Treasuries, and CD’s.
Above all, do your homework and find a competent financial advisor or investment advisory service that is both realistic and allows you to protect your money and grow it, too, with the minimum amount of risk.
In this regard, I invite you to check out the Xcelerated Profits Report, whose mission is to show you exactly how to do this, no matter whether the market is up, down, or flat. Check it out here.
Aaron Lehmann
Related Articles at: www.smartprofitsreport.com:
Five Reasons Why You Should Use This Powerful Strategy In Today’s Crazy Market
The Best Stocks To Invest In During A Bear Market
Follow These Simple Anti-Recession Tips
Sphere: Related Content
