While Everyone Else Runs In Fear, Here's Why I'm Jumping In
Smart Profits Issue #497
February 14, 2008 By Karim Rahemtulla
Investment Director, Smart Profits Report When the going gets tough, the tough go shopping. That's certainly true when it comes to investing - and today, I've got the ultimate retail therapy for you. Just six weeks into 2008 and it's already been a very long year for most investors. Wall Street is worried - hardly surprising since the stock market has bounced up and down like a volitile yo-yo since the ball dropped in Times Square. Fed Chairman Ben Bernanke piled on this morning, stating: "The outlook for the economy has worsened in recent months and downside risks to growth have increased." Like lemmings, investors promptly picked up on Bernanke's comments and stocks sold off. It was amusing to flip the TV on to see the pundits whipping themselves into a frenzy over it, too. It's so predictable that if this were Las Vegas, you could clean up. Actually, the smart investors can. You see, while stocks fall and volatility increases, I become more excited, not more worried. Don't get me wrong... I don't want to see the stock market crash. I don't even want to see a long-term decline. And I certainly don't want to see people losing money. But when you're investing, times like this are going to happen. It's an inevitable fact. The question is: What do you do? Shop Smart In Life... Shop Smart When Investing Most folks try to be smart shoppers in life. After all, who wants to pay over the odds, or full price, for something? I'm a product of the frugal genes passed down to me and I hardly ever go shopping unless there is a sale. Right now, the stock market is on sale, so why not extend that same theory to investing? Be a smart shopper - and smart investor. If you want to buy stocks, ETFs, bonds, or real estate, pay prices that make sense. Of course, we should pay some attention to history here... Let History Be Your Guide... Don't Believe The Hype Since the Great Depression, the market has acted quite rationally by providing opportunities to those who bought at the right time and the right price. Even during the dotcom collapse, people made money by buying early and then selling into the hype. Of course, many people lost money too, but that's because they got in too late and paid too much (not to mention the fact that many companies had flimsy business models and no profits). It really is that simple to me. If you ignore value and get sold on the hype, you're destined to repeat the mistakes of the past. In my opinion, this is one of those times. Remember, there is always a possibility that the market could crash. That would be painful for everybody. But the current confluence of indicators and stimuli in the market do not point to anything other than a good, old-fashioned correction and maybe even a bear market of sorts, not "the sky is falling... sell everything" hype that some would like you to believe. There's Always A Bull Market Somewhere... Find It And Cash In Right now, times are tough for those who joined the real estate party at closing time and bought property at the highs (see today's "Smart Profits Notes" below for a vivid example of this). But it's really no different than other times - like the Savings & Loans crisis, or the dotcom bubble, or even tulip mania. Remember, there is always going to be a segment that gets hurt. But that also means that there will be a segment that finds opportunity in crisis. And those willing to look past the sensationalist headlines, look past the next quarter (or even 12 months) and sniff out bargains may see huge gains if they deploy their cash wisely. And amid the "crisis," there are several factors that can help us... Take Advantage Of The Stimulus Looking to pick up some bargains and profit while everyone else is scared? There are a couple of things in the buyer's favor... - The Federal Reserve is in full stimulus mode
- The U.S. Treasury and federal government is in full stimulus mode
When stimulus is applied to a sick patient, he usually responds. But the questions are: How long until those results take place? Will the stimuli produce the intended positive results? How will the patient finally end up? In the current market, the stimulus is very positive. Interest rates are extremely low and that provides the opportunity for leverage for those who didn't get sucked into the high price game of the past five years. Sure, we hear about pain, but everyone does not share that pain. That's like saying that we're all subprime borrowers, that nobody is saving any money, and that we're all overextended. So ignore the sweeping statements you might here elsewhere. It's just not true. There are many who will take advantage - many who've waited patiently for a time like this. Yes, there are pockets of real weakness in the system - real estate, for one. But just because someone needs an appendectomy, we don't euthanize him to solve the problem. So there is pain and a reduction of the wealth that accumulated at a very fast pace - but not total catastrophe. There are another couple of factors, too... The Dollar Is Dying And The Masses Are Miserable The U.S. dollar's slow, painful demise is a great example of how we overestimate the country's bad health. Yes, of course it makes us feel bad when we hear about our currency struggling so much and how foreign governments are switching out of the dollar. But since when did a government take the prize for intelligence? Maybe you can recall when gold was $250 per ounce - yet the central banks in Europe were selling reserves. Hmm... wouldn't want to take the credit for that call! Yes, a low dollar stinks if you're going overseas. But a low dollar is bullish for the U.S. financial system. Money flows into the U.S. from abroad are dwarfing those of years past. Why? Because foreigners are bargain-hunters too - and U.S. assets are cheap. Consider purchasing power as one indicator. The U.S. dollar still buys a Coke at Wal-Mart for 30 cents. The same Coke that sells for $1 in France. We're not the only ones that know this little secret. Maybe that's why these massive foreign government funds are so ready to provide us with capital. Of course, there could be another reason, too. It's kind of hard to sell a patient drugs (in this case, oil and Chinese goods) if he's dead. As for negative sentiment, it couldn't get much worse. Just about every national publication is calling for financial Armageddon and the death, once again, of the dollar. While The Pundits Take The Market's Pulse, Hit The Bargain Basement The wildcard is luck. But in the case of the stock market and the economy, we don't call it luck. We call it confidence. The worse the patient (i.e. the economy and stock market) feels, the longer it will take to recover. Right now, we're taking the stock market's pulse every minute, counting the time until recovery mode sets in. There will be ups and downs along the way and significant obstacles on the horizon to overcome (one of the biggest being the presidential election in November), but it's just a matter of time. If we can see past the current malaise and look at the stimuli (both domestic and foreign), then we're actually not facing a "run for the hills in fear" scenario, but instead a massive opportunity to go bargain hunting. So do yourself a favor and spend some of your money on some of those stock market bargains. But spend it wisely and with thrift. Wait for the prices to excite you for the long-term. If the patient dies, we'll all be mourning. But if he recovers, some of us will be much better off for taking the time to understand the diagnosis, rather than panicking and fearing the worst. To profitable investing, Karim Rahemtulla Today's Smart Profits Notes: - "To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so." So said Fed chief Ben Bernanke in comments to the Senate Banking Committee. Talk about an understatement. The latest batch of real estate woe came from the National Association of Realtors today, who said existing home sales fell in 45 of the 50 U.S. states, as well as Washington, D.C. during the fourth quarter. The nationwide sales figure crawled in at an annual rate of 4.96 million units - a 21% slump from Q4 2006.
- Breaking down the data, the only states to escape the misery were the Dakotas - the North showed no change, while the South posted an 8.9% jump from Q4 2006. Indiana, New Hampshire and Idaho didn't provide figures. In all, 77 of the 150 metropolitan areas endured a drop in sales, with 16 of them slumping to double-digit declines.
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