Hey folks,
Wohhhh…as I am writing this, the Dow is down 6% and has been as low as 7%. Everything is down…energy, industrials, basics, mining stocks, etc. What’s driving this decrease? I think it’s a combination of hedge fund redemptions and maybe people are simply pulling money out of the stock market. With foreclosures and unemployment on the rise, people probably need access to funds that had been set aside for stock investing. Also, Citi is suing over the Wachovia and Wells Fargo deal. The likelihood is that Wachovia will be split, with some assets heading to Citi and others to Wells. I think that will be good as hopefully the Fed won’t have to backstop for any losses, as was the case in the original Citi-Wachovia deal. However, if you have parked some capital into cash and bought gold (GLD, for example) you are doing ok. I am waiting for the end of the market today to buy more shares of MCD and WMT, as these stocks are much cheaper with today’s sell-off and I expect a bounce back tomorrow since these are both solid companies that should prosper during these times…good quality product at a low price. Also, having the ability to buy these stocks at around a 15 P/E seems attractive to me. The last thing you want to do is sell into a sell-off. Wait for the bounce back to do so.
One thing I just don’t get about the bailout plan is that Hank Paulson expects to get great prices on assets that currently fetch nothing. If the smartest investors are willing to abandon these assets, then why should we look to buy them? So, essentially, our tax dollars are going towards buying unwanted assets on the cheap with the expectation that banks will open their wallets. Who’s to say that banks will be happy to unload these “bad” assets and still be unwilling to lend? I find this to be quite the predicament, as Travolta said in “Face Off.” I guess good ole Hank is happy to be leaving his job next year!
Libor has been all over the place over the past two weeks. What does this mean for the economy? Specifically to the housing sector globally as long as Libor stays higher, we could see even more foreclosures for those homeowners that have their mortgages on a floating rate basis. We are now seeing the ripple effect of the US housing crisis flow to the European markets. UK has already seen a significant drop in residential house prices. However, with mainland Europe, the ECB has already hinted a possible rate cut (on 10/2/08, the ECB held rates flat at 4.25%) to help alleviate this downturn.
Additionally, not sure whether the growth in China and India will continue to be as robust as it has been. Most of the people that can afford to buy cars have already bought them. So, a decrease in the growth rate should be expected. Keep in mind, they are still GROWING!!! Over the long term, I like PIN, an India ETF managed by Invesco PowerShares Capital Management LLC. As for China, with it not being a true democracy and the government controlling much of the growth as was the case with all of the development and construction leading up to the Olympics, I find it difficult to sort out good stock investments. With that said, China will have a lot to say when it comes to forecasts for the global economy.
Well, hold onto your seat belts because I don’t think the worst is over. Did you see this weekend that California is asking the Fed for an emergency loan of $7 billion? Otherwise, the state may run out of cash by 10/23/08. I do believe we will have a near term bounce back (dead cat bounce effect) and I plan to sell some non-gold assets at that point. Until then, prepare yourself, buy some gold and park some capital in cash or trusted money market accounts. Once the dust settles, there will be some amazing companies ready to be bought on the cheap. You might even start buying some shares with today’s sell-off. If you do, I recommend the companies that you can’t not use, such as Kellogg’s, General Mills, Kraft, and P&G. I would place Wal-Mart and McDonald’s into that list as well. Some of the world’s largest fortunes were made in bear markets but with a lot of patience. Let’s add a few more names to that list.
Until later,
Moolah
