Should I Sell My Inestments?

Here is the question of the day: Should I sell my investments?

Now that the Dow has moved down to 9,258 after achieving a high this past 12 months of 14,280 you might feel compelled to sell, because of the stress of losing so much in a short time.  But have you really lost much?  A good way to consider the downturn is to think in terms of how far back in time we have reset the market prices.  The DOW has backed up to about July of 2003.  That is further back than normal but not so far back when you consider that the last time the global economy was this crazy was in the 1930’s.  Back then the DOW lost nearly 90%.  In today’s market that would mean a DOW of 1428 which would take us back to 1985!  I don’t think that will happen because of the big differences between then and now, mainly the breadth of the markets and currency as well as advances in financial product design, not to mention a Fed Treasury already in existence.

So now it comes down to what you believe will happen next.  First, if you have lost money in this market it is because of bad investment advice.  If you ran your own account this is a signal that you didn’t know what you were doing, and if you had an adviser, broker, agent or some other professional, then it is likely he/she did not know what they were doing either, at least they were not letting you know to do any different.  Why do you pay them a fee if they don’t know anything?  I would contend that since about a year ago this was becoming a possibility and somewhere along the way one of you should have known better, you or your adviser.

At this point, what is wise?  You may want to consider the percentage which you could be wrong.  What is the likelihood that the markets will spring upward or fall downward from this point?  It’s hard to tell but if you think the low of the market could be DOW 8,200 (as an example) and we know the high of 14,280, then we know that we are x number of points from the bottom and Y number of points from the top.  You could also reduce the top by some portion of excesses in the market bubble prior to the sell-off.  So we could say we are 1,000 points from the bottom and 3,000 points away from the top if we use 12,000 as our top.  That being said, we are 3/4 of the way down.  That sounds good!  And it could be a good way to look at it.  There is a problem with this thinking.

The problem is that we can’t tell for sure how much the market has built into the excesses because nobody has the numbers from the bankers.  We don’t know the ratio of real money to borrowed money, not really.  When you throw in the idea that banks are networked via leverage (borrowing) across the globe, then we could assume that an obscure bank in an obscure country somewhere, like Iceland, could cause a domino effect that takes down more banks and more businesses.  We just don’t know.  In this case, the example of the low end in the market could be way off, too high or too low.  It is easy to get suckered into the basic thought pattern of either selling out completely or buying in completely.  In reality it should probably be some percentage either way.  If you want out but think you could be wrong, then keep some percentage of the amount you would have in stocks still in the market (25%?) and the same thing in reverse; don’t put it all in at once but maybe go back in with steps and stages of some percentage.  In this way you will not be fully exposed when you are wrong.

Volatility is a newer terminology of mainstream media and finance.  They used to just say “short-term highs and lows” also known as a “trading range” which is still heard once in a while.  The idea of saying Volatility is based on masking the reality that the market is moving up or down, and it implies a finite movement.  In this market, volatility as a term, seems almost meaningless.  The markets are “dropping” or “crashing” seems to be much more accurate than saying the markets are “volatile” (as if the one saying it has any more information than you do).  What they should really be saying is that the markets are dropping rapidly and we are in a Bear Market, and that way you have some idea of what action to take.

Now, what can turn the markets back up again?  People purchase what they think they are getting at a good value.  When the stocks sink low enough, buyers will step in and start driving prices back up again, or at least stabilize the market.  And now we have yet another problem.

This new problem is that we don’t know and cannot tell cearly, what is going on outside the United States.  We don’t know the level of credit problems and meltdowns in other countries.  We don’t know if their economies can handle this magnitude of downturn. The best thing to do is look for evidenc that the markets are headed up again. I like to use the Investors Business Daily because they seem to have this concept down.  Your postion in the market place is up to you, but don’t just react, make a real decision and be prepared to change it if necessary.

Stock Market Panic?

The current action is probably not Panic.  Usually Panic means you will soon be able to buy at a discount.  Instead, with the global negative economic news, this is a wholesale decision to move money out of the markets and into something else for safety reasons, a flight to safety.  If that is true, we can expect panic to occur at a later date, near a lower priced market bottom.

Finding Market Bottom

There are several ways to find the market bottom in a Bear Market:

1. Current value minus Margin equals cash value.  This would be a good one if you could still find the margin numbers.  They are hard to find and skewed because of all the derivatives in the market.  It can help.  In the 1980’s this worked pretty well, but has faded in use over the years.

2. Slope of the Market.  You have to have access to good charts to see this.  If you take the last 40 years of the DOW and chart it to today, then eyeball the chart and select the average low slope, that is the long term trend.  It isn’t exact, of course, but it can give you a hint of the downside potential… mainly where the market could stop falling because it finally reaches real cash value (liquidation value) at a normal long-term rate of return.  As of this post date, it looks like the underlying slope is near DOW 8,000 but that does not mean it will get there, just that it could if things get bad enough.

3. Market bottoms are cyclical.  Look at the chart and you can see that every so many years the market has interim and long term resets to return it to the major long-term slope.  You can make many assumptions about this.

4.  Not to flippant but you can just watch until it becomes obvious.  This works of course, and then you can make a better purchase decision when the upside flags are back in place.  This is all guesswork!

5. For those trying to avoid the downturn to a market bottom, look for the market top.  Usually 3 or more standard deviations from a moving average.  This can signal interim and long term tops.

6. My favorite indicator is the Investors Business Daily, which, if you are an avid reader, has done a great job of doing all this work for you!

7. Ask your advisor.  I like this one the least, but if you have one, make him/her work for you!

You may want to read some of my other postings on the economy and markets to help you with some ideas at www.mparnoldpt.wordpress.com

Good Hunting!

Bailout vs. The People

Goldman Sachs vs. The People?  How about the entire banking and brokerage business vs. the people.  I think so.  First, I am astonished at which people have bought off on the idea that we need a $700 Billion bailout.  What for?  The big wigs like Paulson would have you think this is 1930 all over again, but it isn’t! I will describe the differences:

1930’s: Large corporations were merging like crazy and the number of solvent corporations dropped from the thousands to about 200!  The remaining companies were hoarding cash into their accounts like crazy.  Workers made enough to live but few saved and even if they did it could disappear in a local private bank when it went under.  There were fewer and fewer jobs because of massive automation and fewer companies to employ people.  As the economy turned upside down, Congress passed laws to grab much of the gold in the country and hold it in the reserve to guarantee the dollar.  However, within a short period of time they took the dollar off the gold standard and by law repriced the dollar at half it’s previous value, thus creating inflation but increasing the value of the gold reserves!  All in a few years.  Only about the top 1% of the wealthiest people in the country had cash.  Real estate had collapsed because of borrowing from stock accounts, previously run up in value, which collapsed as cash constraints prevented investors from covering margin and withdrawing to make payments on real estate (Glass-Steagall).  At the beginning of the Great Depression there were few laws on the books regarding the handling of money, the Treasury, and controls.  Most came into being over the next 10 years.

Today: In comparison, there are many companies employing many people, in very diverse markets.  Most markets segments can weather the storm of a banking downturn.  I know for sure, since I study corporate earnings reports, that many companies have been increasing cash deposits dramatically over the last 4 years or more, a major red flag of the Great Depression.  Why?  Because the dollar was becoming cheap and at the same time hard to spend as corporations became more efficient.  So they banked it and started earning interest.  Many companies today could have negative earnings and growth but still show a positive net because of the amount of interest they earned on cash and cash equivalent accounts.  It is not likely we will reach anywhere near 20% unemployment.  We could in fact see a dramatic slowdown with a true depression in much of the world but not in the United States, because we have laws and regulations on the books which didn’t exist before the Great Depression.  Many individuals have cash in accounts, money markets, retirement accounts and they don’t need more debt or credit.  Not everyone has a bad mortgage.  Another big difference is that middle market business, those below $200 Million in valuation, have also been saving cash and finding alternative lines of credit, mostly from private accredited investors, for several years and they are prepared to go somewhere other than the bank for cash flow needs.  The Fed is not in the business of a gold grab at this time, the dollar has already fallen, and we are likely to see the dollar increase in value rather than collapse.  However, the dollar could collapse if the Fed decides to print too many of them anyway.  Still the amount of cash in the system, the number of jobs currently filled, the breadth of business of all types, the lack of a Dust Bowl, although we have had Hurricanes, and many more things do show that the last thing the general public needs is more debt!

All this being said, and the understanding that we are not going to fall back into a Great Depression with massive unemployment and a dramatic lack of real cash in the trading and consumer markets, the fact that companies and regional banks have increased cash deposits, makes one wonder why they need the $700 Billion to bail out the big international firms.  And it really is for them, more than for the citizens.  There are a lot of wrongs in place and this huge debt/credit increase will just simply allow them to continue to run a market that is overbuilt on credit.  Why would anyone want that?  Why give the Treasury, Goldman Sachs, Bank of America and more a brand new shiny credit-card?  We all need to get off the credit wagon and back to the basics of buying what we can afford. 

Just think about what has been happening to all that money in the first place, prior to the need for a bailout.  Much of it goes to large bonuses to CEO’s and other corporate managers.  It disappears into leveraged accounts which balloon up the credit lines as much as 9times the deposit in some cases, and then can be margined again in other accounts, many times, by using repurchase agreements and insurance.  The money was used to speculate on oil, gas, corn, ethanol, and many more commodities.  They bet on higher and higher prices in futures contracts until citizens had to pay over-inflated prices for everything.  Much of this inflation comes from this activity as well as China absorbing higher and higher commodity amounts and jumping into the futures markets.  And remember that much of the money, obviously a significant portion, comes form sub-prime mortgages thanks to Freddie Mac and Fannie Mae.  Whew!  What a deal!  They were betting that the poor people of the country could pay enough of their 100% loan mortgage payments to keep this monster fed for higher and higher prices!

Now think about this!  They  want us to fork over $700 Billion more so that they can snap up all the bad debt, mortgages, homes… however they categorize the final assets, and then they want to hold them until prices go back up?  Not all properties are worthless, but many are on this basis, and many are too expensive to be sold back into the market, since there are no buyers (unless prices go lower).  In order to sell this junk real estate back to the citizens, they want to artificially maintain a higher price on these properties, than they are worth.  In the end they are price fixing real estate at higher than market prices, attempting to maintain and maybe continue the junk mortgages.  Everyone forgets that there is a time cost here.  As the properties remain vacant, who will maintain them so that they can retain value?  The Fed?  No, probably a new Federal Agency. 

If they would just let the properties fall in value, to where speculators can purchase and maintain them at a reasonable price, and put them back on the market, this would all be over much, much quicker.  The population does not need artificially maintained higher bubble prices.  If they pass the bailout, and futures contracts begin to trade again, as they did before, then why would we expect commodity prices to not bubble up again?  That would be crazy, since one definition of crazy is doing the same thing over and over again but expecting different results.

There is enough money in other parts of the markets, few people have to worry about their accounts, and why should we bail out the bad?  It shouldn’t be done!  Not now, not ever!  So instead lets do something much smarter.  Companies need to use less credit, citizens need to use much less credit.  And big international firms need to stop cramming it down our throats.

But they are likely to pass it, now that they are in such a hurry.  In the end, either way, the markets may still correct, earnings may still come down, and people may still worry.

 

Copyright 2008 Michael P Arnold, MPArnold