Liquidity is the Problem

Posted by Ray on October 16, 2008 under Main | Be the First to Comment

Our primary concern with the markets was its ability for the banks to remain liquid. Clearly, with the massive action taken by the Fed liquidity was a huge issue. If the markets had “crashed” while banks had no liquidity then there would have been more problems, but the Fed has mitigated this issue with their unprecedented action.

We still see a major correction coming, but think this is a great buying opportunity for certain sectors of the market. We like the Asian markets as they are more stable right now and have had major selloffs in recent days. Europe offers some good opportunities in Germany and the UK. We are bearish on US stocks right now with the exception of consumer good companies, like P&G and J&J.

With the guarantees on the banking system a market crash is OK, with the exception of the capital loss by investors of course. The guarantees offer you protection on your core assets, cash, but will not protect equity investments. In order for us to fully recover we need that huge selloff without the fear of your bank closing, we have that now.

We still like cash and selective companies to buy, tech, consumer cyclical, energy – natural gas stocks, selective financials- Wells Fargo, and food stocks are decent places to seek value. Be careful in tech, energy and financials seek firms with strong cash positions and high dividend yields, if possible, do not randomly buy anything in these sectors.

Continue dollar cost averaging in to the market 2 – 5% at a time. The volatility will be huge, obviously, over the next few weeks. We think a 20% move down is extremely possible in the next few days based on volume and market sentiment. After that happens you should increase your dollar cost averaging to 7 to 10% at a time, or if the downturn is severe enough 20% + decline add 50% of your cash to equities.

Then, trade it and pull out when gains are viable and hit double digits. Gains in this market will be short-term and the bear is here for awhile given the now $2 Trillion dollar bailout in the US and the $1.3 Trillion bailout in Europe. Inflation will run high as the Fed has reduced its ability to fight it by injecting cash directly into the banking system, plus they will have to print the cash bailout these firms as the world is seeing an addition $4 Trillion in new government debt being issued now and there is limited buyers out there.

Liquidity is good, printing money to add liquidity is very, very bad. That is what is going to happen. The good news is the dollar should hold its own as all currencies will be devalued. Good luck and be sure to come back often.