What’s a Terrified Investor Supposed To Do?

The Dow Industrial Average is down more than 35% so far this year, with an almost 679 point drop today alone.  There’s not doubt about it, but this market is in the midst of a full-blown panic.

Stocks are down, bonds are down or barely hanging on, oil and gold are down, real estate is down.  So given all the doom and gloom, what’s a shell shocked investor supposed to do?  Here are few tips to help you ride out the current market.

• Don’t panic. Now is not the time to sell all your stocks.  If you were going to do that, the time was 12 to 18 months ago.  By selling now, you’ll simply lock in what is still a paper loss.
• Remember your time horizon. If you’re young, this market will provide a great buying opportunity.  If you’re nearing retirement, you may want to follow the next piece of advice.
• Scale back your equity exposure. Don’t sell everything, but it would be wise to have a little more cash than usual.  We currently have our clients with a lot more cash than usual so we can start buying again when the panic subsides.
• Review your asset allocation. Some asset classes have gotten hit harder than others.  Now is a great opportunity to reallocate your portfolio without the tax bite you might get under more normal circumstances.
• Talk to your advisor. If you haven’t spoken to, or heard from, your advisor, now is the time to be proactive and schedule an appointment to review the above items.  You’ll most likely leave that meeting knowing you’re doing everything in your power to minimize the damage of our current situation.

This has undoubtedly been a brutal market that has tested the stomachs of even the most seasoned professionals.  While you may have to make small adjustments to your current portfolio to reflect current circumstances, remember that your investment portfolio is built for the LONG TERM and that, over time, your patience and fortitude will be rewarded.

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Congress Just Doesn’t Get It

Congress continues to debate the government bailout package proposed by Treasury Secretary Henry Paulson, Fed chair Ben Bernanke and SEC chair Christopher Cox.  In the meantime, the markets are spooked and the credit markets are on the brink of complete collapse.  It seems, as always, that Congress just doesn’t get it.

The Congress may have forgotten (or most may not know) that the Great Depression not caused by the stock market crash of 1929, but by the failure of the Government to provide the liquidity banks needed at the time to keep their doors open and lend money to their customers.  While I’m not saying that we’re on the brink of another Great Depression (I’m an optimist by nature), we’re in a similar credit crunch and failure to act could damage our already struggling economy and add years to the time it will take to recover.

Ron Paul was right in his CNNPolitics.com commentary that this mess was created by artificially low interest rates that magnified the real estate bubble, and while his solution of rolling back stifling laws and regulations, divorcing oursleves of Fannie Mae and Freddie Mac, reducing the Federal buget deficit and reducing regulation will work in the long term, in the immediate term, this bailout is the best alternative we have to stabilize not only the U.S. economy, but the world economy as well.

Congress needs to finally get a clue, quickly put together a proposal with the oversight and CEO restrictions they want and pass the damn bill so the financial markets can return to some form of normalcy.

This Time is Not Different

With the bankruptcy filing of Lehman Brothers and the shotgun wedding between Bank of America and Merrill Lynch, many investors are concerned with the viability of our financial markets.  Oh, how short our memories are.

Ten years ago, in 1998, a hedge fund, Long Term Capital Management, failed, creating market panic similar to what we’re seeing today.  The fear at the time was that, due to the size of the fund and its leverage, having to sell its positions could destabilize the entire financial system.

Similar to today, the Federal Reserve and other large banks worked to minimize the damage from the collapse and the world financial system was ‘saved.’  Not only did the doomsday scenarios fail to materialize, but the stock market went on to log one of the longest bull market runs ever.

The moral of the story is that, altough financial crises like this are scary, even for the professionals, this time is most likely NOT DIFFERENT and our financial system will not only survive, but most likely survive.

The Fed’s In A Tough Spot

The Federal Reserve voted today to leave its federal funds rate steady at 2%.  In addition, in its statement, the Fed gave no real indication of which way rates will go in the future because I’m sure they really don’t know at this point what’s the greater risk … runaway inflation or a severe recession?  Inflation hawks, including Dallas Fed President Richard Fisher, want the Fed to preemptively raise rates to cut off any chance of inflation.  Others feel that by raising rates too soon, any nascent recovery in the credit markets, as well as the broad economy, might be stifled and that leaving rates at current, historically low levels is the prudent course.

It seems at this juncture that with the exception of Mr. Fisher, who cast the lone dissenting vote, the Fed feels that the risks are equally balanced between inflation and recession and that, over time, one clear economic theme will most likely predominate.

If there’s one job I would NOT WANT in this world right now, no matter how much money you offered me, its the head of the Federal Reserve.  Mr. Bernanke and his fellow Fed board members are in a truly tough spot.

Over the last two weeks, we’ve seen some signs that inflation is moderating as the world economy slows.  Oil has come off its all-time high, as have other commodities like corn and copper, in response to what is clearly a slowing world economy.  If those trends continue, in the ensuing weeks that should translate into lower costs for gas, food and other goods as lower fuel and input costs work their way through the system.

While cooling commodity prices are encouraging, the Fed can’t become too complacent.  If they keep rates low for too long real inflation could take root and we’d have a repeat of the 1970’s ‘stagflation’.  It’s a case of ‘damned if you do and damned if you don’t.’

It’s becoming increasing obvious that any economic recovery won’t happen in 2008 and may not happen until mid-to-late 2009 the Fed is taking a prudent course until there is enough evidence one way or the other how to proceed.

Another Bumpy Day

There’s no question that the stock market has been volatile so far this year.  In fact, in the first quarter of 2008, the Dow Jones Industrial Average had 35 days with triple-digit point moves and the S&P 500 had 31 days with a move of more than 1%.

Today’s action was no different.  The day started strong, with a better than expected rise in the GDP of .6%.  The was followed by the expected .25% rate cut by the Federal Reserve.  The end result was that the Dow reached a peak of roughly 13010 at little after two o’clock.  After the Fed cut was absorbed and a few more earnings, reports came out, the Dow closed at 12820.13.  For the day, the Dow  had a range from 12808.98 to 13010.00, for a swing of 201.02 points.

It looks like the Fed will now take a breather from the interest rate cuts that have trimmed a total of 3.25%  off rates since September.

With the summer months, which are generally fairly volatile, fast approaching, prepare for this seesaw up and down motion to happen for a little while longer.

As we always tell clients, as long as your portfolio is allocated the way it should be, although unnerving, these wide fluctuations are not unprecedented, nor are they particularly detrimental to your portfolio.

Hang in there.  This too shall pass.

From Ben Bernanke’s Mouth to God’s Ear

In his testimony before Congress, Fed Chairman Ben Bernanke admitted that the economy is slowing and that it could actually contract in the first half of the year, even conceding that a recession was “possible.”

That’s the bad news.

The good news is that he, and many other economists, feel that with the recent stimulus package (i.e. rebates to taxpayers), plus the moves the Fed has made to help alleviate the credit crisis, will grow in the second half of 2008, stating “Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year.”

Although not directly stating it, Mr. Bernanke also hinted that the Fed might not act as quickly to cut interest rates again, instead opting to see how the stimuli in the “pipeline” will play out.

Let’s hope Mr. Bernanke and the economists at the Fed get it right so that if we are in “recession” it ends up being a relatively mild and short one.

Fed Cuts Rates Yet Again

After a week of market chaos, culminating in the fire sale of Bear Stearns, the Federal Reserve announced today that it was cutting its key interest rate, the Federal Funds Rate, by ¾% to 2.25%, the lowest rate in 5 years.   In its statement announcing the cut, the Fed cited the continued downside risk to the economy, suggesting it might be open to cutting rates further if necessary.   The stock market responded positively, even though many experts thought the cut would be a full 1%.   This rate cut is positive for many consumers in that it will lower the rate on things like Home Equity Lines of Credit and variable rate credit cards.  While you won’t see the results immediately, by the end of next month, the lower rate should have trickled through to your statement.  If you’ve been thinking about refinancing your home or you’re looking to buy, now might be the time to pull the trigger.   The flip side to this rate cut is that you’ll see the rate you get on your savings and money market accounts drop and the weakening dollar will increase the cost of imported goods to increase, so expect high gas and commodity prices to stay with us for a while.

Federal Reserve Trying to Hold Off Recession

The Federal Reserve today, in an attempt to improve conditions in the credit markets and, hopefully, help the economy avoid recession, opened its coffers and made $200 Billion (with a ‘B’) of highly-liquid U.S. Treasuries available to primary dealers, secured for 28 days. It also significantly expanded the types of securities that can be used as collateral for loans, allowing them to swap mortgage notes it can’t sell for government securities that can easily be sold to raise cash.

The hope from the Fed is that this action will bring some normalcy to a credit market that has all but dried up in recent months and that this cash infusion will allow banks to lend money to keep the economy moving.

The financial markets have responded well to this latest move, with the Dow, NASDAQ and S&P all up more than 3.5% today.

The other positive aspect of this move is that, unlike a broad interest rate cut, this strategic bump helps a specific portion of the market without stoking the fear of increased inflation.

Finally, to its credit, the Fed is being pro-active in addressing issues caused by the sub-prime meltdown and is using every tool in its arsenal to both (hopefully) contain and minimize the long-term impact.

Stay tuned to see how this plays out.