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.

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A Decent Relief Rally, but It May Fail

Posted by Ray on October 9, 2008 under Main | Be the First to Comment

Yesterday we saw 4 reversals in trading on somewhat decent volume, but the market still closed down after being up nearly 200 points. This is an indication that there is more selling pressure to come, especially since the Fed has made such strong moves to quell market concerns.

Even good news, such as unemployment and the fact that the government may buy into banks have not lifted the markets in a noticeable fashion. We hate to be the doom and gloom people and do like to see the market go up, but we feel a sense of duty to tell you what we see happening. The data still says the markets go lower.

We like 40% + cash positions still and would be selling into strength. Friday and next week will prove interesting and we believe you can buy into the markets at a much lower level. We did get some of our day-to-day predictions wrong, but cumulatively we were correct in what we predicted.

We are not rooting for a crash, but it needs to happen. We need the markets to have a swing down and close on its lows with heavy volume. That will represent a bottom and then begin to dollar cost average in as volatility will remain high for sometime to come. This, of course, is barring unforeseen problems such as further bank failures or worse.

I cannot believe we are going to even say this, because he is oh so wrong so often, but Cramer is correct on his predictions of the market. Where we do not think he is correct is in his long-term money. We think you should move some of this to cash as well, the 40% mark is a good place to start. It makes no sense to say that short-term money needs to be moved, which it does, but long-term money should suffer.

At 40% cash you have enough in equities to catch the recovery, whenever that occurs, and enough to dollar cost average back into the market to mitigate potential losses. Right now, it just make sense…unless you think that the Fed typically puts in money to bailout banks, money market funds, bonds, commercial paper and arbitrarily cuts rates overnight.

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