Monday, October 6, 2008

Stocks Tumble on Global Slowdown Fears

Good Morning Folks

What a start to the week. Stocks have now dropped 350 points which puts the DOW below the famed 10,000 level. To put this in perspective, the DOW was around 10,300 in early 1999. This is now officially a lost decade of investing.

You have gotten a 0% return on equities over the past 10 years. Stocks are not always the place to be folks despite what the pigmen tell you! The dollar cost averaging/stay in the market theory that they love to use can ruin your 401k.

A good financial advisor should be having you focus on preservation of capital. You want to try and preserve the money you have versus focusing on growth and returns.

If stocks drop 30%(which they already have) and you hide in fixed income and grow your money 3%, you are way ahead of the curve! Now its a little late in the game to move everything over now because stocks have dropped significantly. However, moving some money into fixed income would be a prudent move right now IMO. This is a nasty market folks.

This has happened before and bear markets can last a loooong time. Take a look at the most recent long term bear market that started in 1966 and lasted until 1982:


My Take:

As you can see, bear markets can be brutal and last for years. The Nikkei tumbled 4% last night which brought it back to around the 1984 levels. Imagine investing for 24 years in Japan and having zero returns!

Stocks don't always go up, and what we are beginning to learn is the pigmen took huge unwarranted risks to ensure that they did via leverage. This is great when the game is working and we are in a bull market. However, it can be devastating to the market when leverage reverses and your bets in the markets via leverage turn out to be bad ones like the AAA subprime mortgage bets.

When the bets turn bad, the leverage that allowed you to make so much money when the market was moving higher, forces you to take much higher losses as it goes back down.

Leverage can also wipe out a financial system. Too be honest I am afraid too see what the markets look like when all is said and done. We need to start focusing on solutions and stop throwing liquidity into the system. We are wasting hundreds of billions of dollars that will be needed down the line to take care of cleaning up this mess. Who knows, we may need this money to feed people that end up on the street because of this disaster.

Bottom Line:

Continue to play defense. There are a myriad of reasons as to why we are down today. Germany was forced to baikout HRE to the tune of $68 billion, commodities are free falling, and emerging markets have dropped the most in over 20 years.

I believe the biggest reason for the selloff today is psychological. I think Americans have lost confidence in the stock market. 60 Minutes had a great report on the credit crisis and why people should be scared. Quarterly 401k statements will be hitting mailboxes all over the country this week that will show huge losses. Many funds were down 10% in the quarter.

Large selloffs often occur when the masses lose confidence in Wall St. There is only so much pain an investor will endure until he finally tells his broker to sell! This is the biggest threat to stocks in the short term. We all know the fundementals are horrific. The lack of trust and confidence is the name of the game today.

What Wall. St. did is a tragedy. Retirements have been destroyed by their greed. Many baby boomers will now be forced to go back to work This will turn out to be the biggest fraud in American history when its all said and done.

The lawyers are going to have a field day with this. My god, the DOW is now down 550 points. I will be back on later with a recap following the carnage.

Don't be surprised if we are down 1000 points today.

Stay tuned.

6 comments:

John Maynes said...

"Don't be surprised if we are down 1000 points today."

Jeff, you are really scaring the shit out of me. Maybe it's time to buy now. lol

Minton Mckarkquey said...

The 1000-point drop day could well be today since London is down 7%, Paris 8%, etc. Hey at least the bailout worked!

Minton Mckarkquey said...

Hey Jeff - did you see Cramer this morning? (http://www.msnbc.msn.com/id/21134540/vp/27045406#27045406)

Cramer is telling people to get OUT of the stock market if they need the money in the next 5 years. He looked like he was about to cry!

This is from the guy who was trying to sell us Wachovia stock two weeks ago...

Jeff said...

Minton

LOL

Booyah!

Down almost 700. Unbelievable. Carnage everywhere.

How low do we go today? 10%?

John Maynes said...

Jeff, your call might be right on the spot. WOW!!! 90m to go and 300 points. Are you taking bets?

Jeff said...

hedge funds are getting slaughtered. Some are down 20-30% for the month.

Lots of liquidations so the hedgie's can payoff redemptions. Gold through the roof. Oil down.

Down 1000 points post bailout approval. That worked real well..Geez.