Fear Goes Hand in Hand with Drama 22 comments
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Fear seems to be escalating as we move closer to the final bailout, which leads to concern for what the consequences will be. How long will this take to sort out?
One reader expressed concern for an L-shaped recovery, which is to say stocks not going up for a long time.
One thing is certain, having an emotional reaction will not make things better.
We know a couple of things about the big picture. The crisis is such that there will be big failures. Hang with me on this. There are always big failures during events of this sort. The failure of WaMu (WM) seemed to not matter to markets. The shock of big failures on this go-around is over. This may help toward easing apprehension which, in my opinion, contributes to the idea that in terms of points lost we are much closer to the bottom than the top (my thought all along has been a bottom around SPX 1095). The timeline for a bottom is anyone's guess; I'll go Q2 2009.
We know that dramatic action is at hand. Either a bailout comes through or it does not, and if not we may have a bit of a panic as a reaction (a no-bailout-panic might actually resolve this a little faster).
So that is my opinion about what will happen (nothing new). It will either be right or wrong but hopefully I have conveyed my being less concerned with being right about bear market magnitude and more focused on sticking to the defensive strategy I laid out long before the crisis began. If you did the same, then you took proactive action and were not faced with we're down 20%, what should we do?
I would suggest anyone focus more on your portfolio than on full and first comprehension of the bailout and other current events. If this market decline turns out to be worse than a normal-ish bear, what will you do? If it takes longer for the US market to begin to come back, what will you do? If you really think the end is nigh, what will you do? As you answer those questions you need to also ask yourself what you will do if you are wrong.
I've mentioned a few times that if the US is facing more of a secular thing, okay, but there are some countries that are only dealing with cyclical issues, so those countries become attractive as a starting point. I've been in the camp that thinks higher US rates are coming (way way too early with this), so an inverse treasury fund might become a good hold. If the dollar is headed lower, then maybe a diverse mix of foreign T-bills becomes attractive. A lot of the absolute products that were supposed to do well in a bear market will probably begin to work better as we start to stumble along the bottom (the idea behind that being that strange distortions caused them to behave strangely).
There will be no shortage of things that can work, but they may be more difficult to find. The task might not be so bad if you have been willing to go narrower than SPY / EFA / IWM for your equity exposure.
As you think about this, I would add that if the outcome for the US turns out to be as bad as the gloomiest people think, then we all need to heed that Will Rogers quote about return of as opposed to return on.
I will paraphrase from above: more emotion will not help you, but less probably will. The outcome is beyond your control, but staying level-headed and calculated is within your control. Focusing on this gives a better chance for a superior outcome for you personally.
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This article has 22 comments:
While that might not matter for all the joe-sixpacks out there living paycheck to paycheck, the other worker-bees who save and invest are seeing first hand that it isn't safe to believe anything you hear or read issued from those sources if you ever want to see your money again. Think LEH, AIG, and WM shareholders and WM bondholders who lost everything in the government's rush to save the banks at their expense.
It's probably a good thing that these big banks are establishing huge lines of endless credit from the FED. Nobody else with a brain in their head is going to be willing to let them touch their savings for a long time.
all depends on your Portfolio,
here is a conservative survival kit:
SMN UltraShort Basic Materials ProShares22.92%
EEV UltraShort MSCI Emerging Markets ProShares20.96%
QID UltraShort QQQ ProShares10.34%
SIJ UltraShort Industrials ProShares9.86%
DGP PowerShares DB Gold Double Long ETN9.73%
SDS UltraShort S&P500 ProShares9.64%
IEF iShares Lehman 7-10 Year Treasury Bond Fund9.47%
TWM UltraShort Russell2000 ProShares7.08%
Short term Treasuries also could make your dollars safe. I suppose for the more speculative gold/silver could hold some options. But I remember the old testament comment on gold "do not place your faith in gold" but that saying is 6000 years old....MarvinMBA
Cash reserves may be ravaged by inflation. Central banks are printing currency, worldwide.
Financials are consolidating, and the survivors will be highly profitable following this turbulence.
In summary:
American People and the U.S. House of Representatives to Wall Street, George Bush, Secretary Paulson, Barney Frank and Nancy Pelosi...
KISS OUR REAR ENDS!
You were NOT trying to save OUR WAY OF LIFE. You were trying to save YOUR WAY OF LIFE. What's the matter Nancy? Won't be able to go to that $300.00 a visit hairdresser anymore? Bush? You and your administration lied to the American people one too many times.
Wall Street... BURN BABY BURN!
Roger, I agree with most of what you've written. Really! This is GOOD for the markets. Let them FALL. Let them BOTTOM OUT. For the past decade it seems like it's in their best interest never have anything go down. Maybe the Bush-Paulson team should have passed legislation with the SEC that made it a federal offense for any stock market in the jurisdiction of the United States to go down. Wouldn't that solve the problem?
ON THE BRIGHT SIDE... I've lived in several countries and I've seen relatively vibrant countries turn into hell holes... Places like West Africa... Mobs pulling the elite out of their cars on the street and hanging them on street lamps. In one country, Nigeria, after a coup, they blamed the current government for their economic difficulties. They rounded up the government leaders, including the finance minister, drove them to a place called Victoria Beach, tied them to palm trees, then shot them. One of them, and it may have been the finance minister, had a heart attack and died. Get this... They took him and tied him up on the palm tree and shot him even though he was already dead!
Are we going to see anything like this in the United States? NO! NO! NO! I think the worst we may see is something like East Germany... Long lines for everything. Short supples of basics... No work...
This may last for a decade or so... Remember, we have been living the last 10-15 years borrowing against the future... The future is NOW. Payback time...
No pain, no gain.
About an hour or so before markets close, when they are really tanking, the Bush Administration uses the New York Times, the Wall Street Journal, or some other media outlet to spread some false rumor in an effort to bump the markets. Give it up P,B & B! You are now relegated to dinosaur status. Let DEMOCRACY AND THE FREE MARKETS REIGN!
This time BAIL AMERICANS OUT FIRST, WALL STREET SECOND. Let's call it the "trickle-up theory."
"We've got a problem..."
Yes Bush. It's called DEMOCRACY!
phdinsuntanning, not sure that is a conservative survival kit. It might be a goldmine in a down market but if the market staged an improbable rally that mix would get obliterated. it is a huge bet that could work of course but there would be blood if the low ends up being today; not my prediction but clearly a possibility.
The other way we would have more chance of it coming back.
algoa makes a good point - today's tumble evaporated the same amount of $$ that would have been included in the bailout. This bailout will get tweaked over and pass at some point though.
curbs-in - sure like to hear/see yourself talk don't you?
phdinsuntanning - hope you covered all that trash before close cuz tomorrow will be different.
I have been very consistent saying that I am more focused on portfolio defense then being right about this (i say that in this article). As a matter of fact the action in the broad stock market is not worse than normal.
How can it be worse than normal until it is worse than normal?
all trash covered on 29, but the gold mine will be open again when todays lemmings rally peaks, after lunch probably or before 4 pm. Is not my style, but, what the hell, we can dance even with this music.
only BIG CAHUNA!
I hope girls be friendly in gehenna, see u there!