Keep Your Seat Belt Buckled - The Ride Has Just Begun

A former investment banking colleague had a line for weeks like this. “It’s like trying to catch a falling knife.” He sweated every down day. And still does. It was as though he personally felt guilty if the global markets were down, and his institutional sales clients were seeing red across their portfolios.

Last August, recognizing that the wheels had come off the banking industry and the impact this would have on stocks and the economy, my advice was to ride it out (see prior post “Buckle up - the wheels have come off“, August 13-07). Some friends are trying to make money on the swings, by doubling their exposure to gold or buying U.S. currency futures, and they might be right. But taking cash resources and ploughing them into stuff that is highly volatile isn’t a strategy to bring calm to your life.

As Asian markets gap down again today, and European indicies slide another four percent (putting the two day drop at 10%), the bright spot is that the Dow futures were now off just 476 points as of 6:15 a.m. EST, having indicated down 556 points about 45 minutes ago. The NASDAQ was faring even better. The Dow looked to open down 4%, yet the futures on the tech heavy NASDAQ speak to a 0.6% downward move on the open.

Just last night, one trader said the Dow would open down 1,000 points — unless the U.S. Federal Reserve announced a 50-basis point rate cut at 8:30 a.m. this morning.

Who knew that the Fed was in the business of controlling paper losses in the stock market?

It isn’t that simple, of course, as the performance of the U.S. stock markets are increasingly tied to the fate of the American economy. That’s a reason for the Fed to care. A glum homeowner who is also a glum investor may well decide to stick to their New Years’ resolution of curtailing their discretionary spending. Unlike going to the gym or sticking to a diet, you can’t spend money that you don’t have. Unless, of course, you refinance the equity out of your home. Something the U.S. consumer has done with great success over the past few years, but those loans are hard to come by these days. Particularly if you live in places like Florida, California, or Michigan.

Even if this market turmoil was predictable (see prior post “Now about that correction,“ November 27-07), I’m not sure what an individual investor could have done about it.

If you were listening to Kevin “Simon” O’Leary on BNN TV after the close yesterday (CNBC was in reruns for the U.S. holiday so I had little choice), you’d think now was the time to buy. Simon relayed a story about him calling his stockbroker at 3:55 p.m. on Monday with a shopping list of stocks. “We’re not buying now!” was his brokers reply - but good old Simon knows better. Avner Mandelbaum might be worried about this being month one of a three year correction, but not Simon.

There’s no question that the Bank of Nova Scotia (BNS) and PetroCanada (PCZ) are trading down more than 15% in the space of a few weeks, Manulife (MFC) is at $35.50 (10% drop in 5 trading sessions), microcap software maker MKS [MKX:TSX] is sporting an annual dividend yield of 8%, and the CIBC (CM) is down about 30% from the C$94 share price it used to strike employee LTIP payments late last year. BCE (BCE), the mother of all head-faking stocks right now, has upside of about C$8 if you believe the Teachers deal is going through. If the deals falls apart, the stock falls to about C$24 — C$4 lower than the price prior to the LBO rumors, given the news about the increased competition in the Canadian wireless market. C$8 up or C$10 down - it's kind of like playing Roulette in Las Vegas, except without the free drinks and the silicon.

But does this make these stocks all a buy this morning?

You have to believe both that the overall market mood will improve quickly, and the near term earnings capacity of certain stocks will hold together.

After all, you could have bought all the Manulife you wanted at C$35 last summer and last April. BNS hasn’t been below C$44 since the Spring of 2006. Prior to that it could be had for C$42 a share in the Fall of 2005. PetroCanada has been available at lower levels on five different occassions over the past 2 years, pushed around by swings in the price of oil.

That’s not to say that a dollar-cost averaging buying strategy isn’t worth proceeding with, where you invest one-third or one-quarter of an investing cash reserve into your favourite beaten down stocks. Just make sure you know why they’re beaten down.

A broker once sold Nortel (NT) to a very close friend at something like C$49, on the basis that it “had been a C$120 stock not that long ago.” Nortel trades at C$12.70 now. After the massive amalgamation, my friend’s cost base is now C$719.10.

The message is simple. If you don’t have conviction, just sit tight. And if you don’t have any particular reason why your favorite stocks will be higher later this quarter — other than the tried and true “if you liked it at C$36, you’ll love it at C$19″ — just keep that seat belt buckled.

However, if you’re an entrepreneur trying to raise money right now, there is one thing you can do. Particularly if you have the luxury of a chance to raise capital right now. Take the advice that served BMO Nesbitt Burns Managing Director Harold Wolkin’s clients so well for two and a half decades:

When they pass around the cookie tray - take one!

Disclosure: We own BCE, BNS, MKX and NT in our household.

Comments

[foreigner]

These cookies may be laced with rat poison. I'm itching to put my 30% cash holdings into use, but the so called bankers might have another surprise for the small investor-we'll know soon. For now I'll go with junior gold, TRAMX and a couple of beaten down chinese stocks. Meanwhile I like to see a new watchdog agency created-made up of ex insiders turned whistle-blowers to keep an eye on the wall street con men. In my opinion that's the only thing that can raise small investor's confidence in the system. Also place a ban or major restrictions on professional level shorting (have you noticed how Bloomberg's pushing Proshare ultrashorts lately).