Friday, March 28, 2008

Stocks Slump for the 4th Consecutive Day

TGIF!! I hope everyone had a better week then the stock market did.

Just a few comments on the markets. What you are seeing is very typical of a bear market. Low volume days due to a lack of confidence among buyers that the worst is over.

IMO you will not see any major rally in the markets until the financials show their losses, housing finds a bottom, and the consumer recovers. The builders came out this week after earnings and admitted they still don't see the bottom yet! I would be selling into any rally moving forward. Use these bear market rallies as a way to get rid of stocks that you don't like or that don't do well during recessionary times.

Your investing strategy needs to dramatically change when a bear markets hits. You need to stop playing offense and start playing defense with your investments. Some like to call this a period of "capital preservation". What you try to do in bear markets is protect what you have so when the cycle changes back into a bull market you will have money to take advantage of it.

The key thing to realize right now is we are still in the middle of this crisis. I would say we are in the 3rd inning of this bear market. The S&P drops 28% during the AVERAGE recession. We have only dropped about 15 percent from the highs of summer '07. If this recession is only average this means we still have another 50% to the downside. I believe this will be a very bad recession.

The key to being successful during times of crisis is to not try and call a bottom yourself. Do not listen to the talking heads on CNBC that are telling you that we have seen the worst of it. Remember, Wall St. only makes money when you purchase investments. CNBC has to put these stock pumpers on TV because they have no show or inside scoops without the cooperation of Wall St.

You need to continue to focus on the fundamentals and tune these people out during bear markets. I can remember analysts after analyst on CNBC calling Nasdaq bottoms during the late 1990's tech boom at Nasdaq 4000, then 3000, 2000 etc. Do your own research and read quality finanancial publications like Bloomberg, Barrons or the Financial Times from the UK. Its very boring staying out of the markets but its worth it if you avoid losing 50% on stocks during a bear market.

Trust me, I want to be a bull. Its much easier to invest in a bull market. Buying mutual funds and having them rise 15% a year during bull cycles is great but if you don't protect your wealth when the cycle changes then you haven't realized any gains. There was an article called the lost decade this week that talked about how the S&P has only risen 1.3% in the last 10 years. If your money was in a CD during this decade it would have earned 4 times that.

I would advise getting into some fixed income and protecting your wealth. Save your equity for the next bull ride. Wait until Wall St. is forced to become transparent before investing. The fraud that we have seen in housing is something we may never see again in our lifetimes. To think that we get out of this debacle with only a 15% loss is a bet that I would not take.

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