The last dozen years have been difficult. In Michigan it seems as if we’ve been in a depression for all our lives. The markets since the 2000 dot com crash and correction have continued to act as if they’ve been permanently medicated. Certainly they’ve not acted in a functional and dependable way. For that we can thank politicians and Wall Street Bankers. Most are now on summer break or campaigning to be reelected because of the ‘swell’ job they’ve done and a promise to ‘do better’.
Now we are faced with another crisis coming at us on top of the 2008 Depression. The markets have fallen for 11 straight days all the while Washington politicians dithered, ignoring our pleas to compromise, and creating enough of a true mess where, for the first time, the credit rating of the United States has been downgraded. One of the reasons S&P handed out the lower rating was because they reasonably saw a dysfunctional political process. I cannot imagine a more humiliating experience than to be a politician and named as a primary reason for the humbling of the greatest country in the world. How these people responsible will answer their constituents in explaining how they got to be part of the problem instead of finding a solution is beyond me.
So where do we go from here?
Jimmy Cramer said on his program Thursday that investors want to know one of two things: They want to be told that things will be okay or to tell them to sell everything they own. Neither is practical. Selling after the fact and when there is no need is just not in the cards. Remember what happened to those that sold at the bottom of the depression and still haven't gotten to where most of you are. They lost a lot more than the folks who bought and held. Once you sell you just never seem to time your reentry to take advantage of the uptick. Fundamentals from an investment viewpoint are better than what we’ve experienced. This latest crisis is a direct result of lack of leadership and concern for anything other than political advantage from Washington.
Sunday Randall W. Forsyth in his Up and Down Wall Street column for Barrons wrote, ‘The market’s action last week suggested a liquidity event like 1987 rather than a systematic crisis as in 2008, according to David P. Goldman, the former head of credit research at Bank of America. There was an intense scramble for liquidity that suggested selling by hedge funds, which prompted an across the board dumping of all assets, especially those favored by the hedgies, such as the aforementioned emerging markets and commodities.’
Michael Santoli, from Barrons.com shares his views on what we can expect next. I have taken literary license to condense his answers.
This is not like 2008. Don’t expect the same thing to happen like it did in 08. True. the markets and investors are jittery with close memories of 2008 and the more recent market Flash Crash of May 6 2010 where the markets suddenly swooned 900 points. We will see volatility. But, it’s not the same.
On Europe- unlike Lehman Brothers which was politically killed by rivals in and out of the government-(my thoughts)- the PIIGS cannot go out of business. Spain is just not going to fold up and go somewhere else. Their debt costs can go up, people will suffer but they wont close their doors and go out of business.
Is it possible to tell if a 10% correction (it’s 11% and counting but close enough) will be the start of a Bear Market? The answer from John Roque at WJB Capital says in the past 17 years in the 7 prior instances when such an extreme was hit the index was higher 2 weeks and 3 months later each time. But some of those were preludes to much lower prices rather than all clear signals.
Andrew Bary reports that for many of us its time to start shopping for bargains. His article states that while no one can predict when the sell off might end if the S&P 500 merely gets back to its 2011 peak in April the index will close UP 14%.
In this week’s Bloomberg’s BusinessWeek Barton Biggs, once of Morgan Stanley and co-founder of Traxis Hedge Fund, said August 3rd after 7 down market days and before the U.S. downgrade, ‘ I am very tempted to think this is a time to be buying stocks pretty aggressively. We are going to have a strong rally out of this position.’
Hold the phone, says Mark Hulbert. Many contrarian indications suggest that too many short-term market timers have refused to toss in the towel on their bullishness. Until they do contrarians believe a durable bottom won’t be in place. In other words there may indeed be more selling to wash out the courage of conviction.
John (You Can Call Me Billionaire) Paulson said the economy is doing well enough to keep earnings rising and bring back some bullishness to the stock market.
In each of the prior three times the S&P fell 10% or more on 10 trading days the markets rallied an average of 18%. Those times were late 1974, October 1997 and August 1998.
In Smart Money the consensus is not to sell and some investors are ‘tantalized’ by the valuation of some of the largest stocks such as Chevron, Goldman Sachs and Intel all under 9. Well Fargo told its clients that a significant segment of today’s stock market is very inexpensive.
Domestic stocks may be done selling. It is worse overseas. The Euro Stoxx 50 index is down 15% this year, Japan’s Nikkei is off 9% and Brazilian stocks are off 24%. The U.S. markets have just reversed all their gains.
On the S&P downgrade Matthew Rubin at Neuberger Berman said, ‘It has a definite fear. The markets are being driven by fear and not fundamentals….it will have a detrimental effect on the American psyche.’
Of course no one really knows what will happen as we have never been here before. But even with the downgrade of U.S. Treasuries the reality is that there is nowhere else for investors to flee to safety except U.S. Treasuries. Investors look for political and economic stability in addition to timely payment and guarantee of principal. There is no alternative to the U.S. dollar.
From Heard on The Street Monday August 8th, ‘ Experience has shown that a downgrade doesn't have to be catastrophic for government debt. When S&P downgraded Japan early last decade, yields on government bonds had a muted reaction and 10-year government bonds remain around 1% today.
From Bloomberg.com on the downgrade consumers may see higher interest rates on their credit cards and increased interest on new mortgage rates. There will be a trickle down to a higher cost to the average person.
Marilyn Cohen, president of Envision Capital Management, says the market may have priced in a downgrade.’ Jeff Reeves at Marketwatch wrote the downgrade means nothing. Washington, he notes, is still useless, and Treasuries are still safe havens. He concludes what we already know, ‘…the downgrade is just the latest development in this asinine game of chicken that Congress is playing to decide the White House in 2012.’
Warren Buffett said, ‘Cutting the U.S. ratings was flawed. Financial markets create their own dynamics, but I don’t think we’re facing a double dip recession. Clearly what the stock markets do have is an effect on confidence, and this selloff can create a lack of confidence.’ He went on to say that the U.S. rating should be quadruple A rating.
And, if you want to see stocks worth buying or funds worth holding go to my blog.
And, finally, from my perspective the Fed meets and may see the need to do a QE3. For that we have to wait and see.
Hope this helps and if you need anything else please call Paul Stanley @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this and all my blogs with someone who cares about their money.
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