What should investors do now?
Tags: Economy + finance + investing + Markets + money + wealth
Yesterday Fed Chairman Bernanke told Congress the risk to growth in the economy was greater than the risk of inflation to the economy and so the Fed was prepared to continue lowering rates. Bernanke also acknowledged the likelihood of some smaller banks failing. Enough said,
investors dismissed the administration’s lip service for a strong dollar policy and headed for the exits pushing the Dow Jones down 313 points. Other major market indices followed suit making this week a dismal one for the record books.
The rumor mill may have contributed to today’s precipitous decline in the markets. News that some hedge funds were liquidating Muni bonds no doubt also contributed to the decline. Meanwhile investors moved into safe havens pushing Treasuries to new, we might add, ridiculous low yields.
So what should investors do in markets so treacherous? The answer in part depends on your investment horizon and tolerance for pain. On the one hand long term investors need to take solstice in the fact that large US companies will by and large have good earnings from their export and international business. SB estimates that a full sixty percent of the S&P500 companies will meet their first quarter earnings guidance and it will be mainly the consumer discretionary and banking companies who disappoint. On the other hand though, even long term investors need to keep some powder dry and limit loses to a range of 8-10 percent. Anymore than that and the law of geometric loss destroys any comeback move. ( a fifty percent loss for example requires a 100% return to get back even!).
Sectors flying high should be avoided as a slowdown will adversely affect every industry– and the high fliers eventually even more. Look to play some defense and look to put sidelined money to work at pre-determined price points. Finally, invest to ‘get paid while you wait.’ That means look at Telecoms, Preferred stocks, REITS that pay income, and select regional brokers and banks, but only after reading their annual reports and headline news. Avoid banks who have had big write-offs and those heavily in the consumer credit card business. For those willing to sell short. Do it. Tech, Utilities, Basic Materials, Bonds, Commodities, and select Financials– those sure to report greater write-offs. For now avoid high yield bonds and for that matter all bonds except high quality corporates. US Treasures in our view have only one way to go from here and that’s down in price and up in yield.
Then just bide your time because bargains are coming. In our view the major market indices will test their lower support levels. That’s Dow 10,000- 10,700; S&P500 to 1250; and Nasdaq to 2075 range. Wait to pull the trigger until you can confirm the move back up. Watch the market leaders for signals. And, if Ginnie Mae’s losses have not yet been disclosed or talked about, remember not to jump all the way in so you have some buying power left.
February 29, 2008 - Markets 
2 Responses to “What should investors do now?”
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Absent in your recommendations is investment in the ADRs of foreign companies. Why?
Foreign ADR’s of same select sectors are good too but have not yet declined enough. They could be a good dollar hedge too, though at some point, not in the too distant future, inflation will take a second seat to trade and foreign govs may cut rates to reverse the dollar advantage in a slowing global economy.