Bailout Is Just the Beginning

Keeping our focus on investors and what they can do to improve their portfolios as we slog through the current market downturn, we recently spoke with Chris Williams, who is the Director of Trading for Zacks Investment Management.

How is the current bond market meltdown affecting equities to this point?

Well, our economy has always been a credit driven one. Each individual, small business, or large corporation depends on some form of borrowing to sustain and grown their respective balance sheets. When credit markets tighten, as demonstrated by the ramping money market rates and the 3-month LIBOR overnight, it becomes extremely difficult to borrow -- period. Financial institutions, individuals, and corporations begin hoarding cash and bunker down into a capital preservation mode. Without access to credit, these entities will suffer and can fail -- and fail fast.

The market’s main focus is on the Treasury’s proposal to buy close to $700 billion illiquid assets from financial institutions. Congress’ ability to pass this quickly should help to bolster the perception that our financial system can be stabilized.

Would you cite this as the beginning of the end of the crisis?

Even after a form of this proposal gets passed, the US economy still has to contend with pieces other than the magnitude of the current financial crisis: extremely weak consumer, an ailing industrial sector, volatile crude oil prices and slowing global growth. So we will be nowhere near "out of the woods" after the bailout package becomes finalized, but it would be a crucial step to rebuilding a broken system.

What do you see as crucial to any approved program?

An important anchor to having the economy avoid a long recession is to quickly rectify the credit markets to ensure that borrowing between banks, corporations, and individuals can resume in a more normal fashion. The flow of credit must be unfrozen.

Which stock recommendations would you make for us, based on your current outlook?

Well, in this more defensive climate, the kinds of stocks that do well do one of two things: they increase their dividend yields or they buy back stock. This demonstrates to investors that the company is confident in its outlook and on its balance sheet.

McDonald’s (MCD) is a good example of a company that does this. The company recently increased its dividend 33%, and the Street took notice. As a result, on a day like today [Friday] when the markets are down a percentage point or so, MCD is up 50 cents per share [in morning trading].

As far as share buybacks, Nike (NKE) earlier this week announced it will be buying back $5 billion in stock, and this follows an ongoing buyback of $3 billion. Two days after this latest buyback announcement, the company blew out earnings by 10 cents per share and went on to close up 8-9%. The stock is up $1 so far today.

What’s more, even in this weak environment the company is performing well. World-wide futures orders are up 10%.

Chris Williams is the Director of Trading for Zacks Investment Management.

Comments

[msoori:]

Housing crisis the only the symptom, the cause is the continuing off-shoring of American jobs. Till we fix that how are we going to see an improvement in economy? People go into foreclosure because they have lost jobs. When and how are we going to address that issue? Read more at xmplary.blogspot.com

2008 Sep 29 08:19 AM

[bobbobwhite:]

Each broken thing in the global economy must be addressed in turn. Sure, lots of it is broken, but the bailout will be THE huge start toward mending Wall Street and Main Street, and then many other areas needing work will fall into the appropriate line. But, we must start now with this as we are in business limbo with nothing getting done, and limbo has a vey misleading definiton as it is actually much worse than its definition....it is a black hole where everything in it loses its (m)ass.

2008 Sep 29 01:13 PM

[WAKEUP:]

Don't buy anything that you don't have to have, right now. Prices are going to fall, and fall. Buy when there is blood in the streets. Until then, stuff that mattress full.

2008 Sep 29 01:40 PM

[xmichaelx:]

@Arabianmoney -- this is the perfect time to buy, when stock prices are low. There are TONS of steals out there. Yes turnaround might take a little longer than in 2004, but for those of us who aren't day-traders and have a longer time horizon, a market like this is a gift that only comes around once every 10 years or so.

Stocks 101: Buy low, sell high. Prices are low right now.

2008 Sep 29 02:06 PM

[WAKEUP:]

"Buy when there is blood in the streets." Make that, "Buy when there is ankle-deep blood in the streets." You'll kick yourself with your bloody foot, if you buy, now.

2008 Sep 29 02:16 PM

[Econ 101:]

WAKEUP is right, stocks are going lower, 1789 anyone????

2008 Sep 29 02:26 PM

[johnthebear:]

A safe place to sock away your money?

TNH Terra Nitrogen Co.

EPS $13.95
PE 7.52
YIELD 14.24%

75% of the stock is held by insiders and there is very low trading volume. Yesterday was only 195,000 shares! I own the stock and recommend it.

2008 Sep 30 10:26 AM