The Element Of Surprise And A "Giant" Upset... How A Sports Shock Relates To Investing
Smart Profits Issue #494
February 6, 2008 By Marc Lichtenfeld
Senior Analyst, Smart Profits Report I watched in disbelief as the New York Giants knocked off the New England Patriots last Sunday in the most thrilling Super Bowl that I can remember. It was also one of the biggest upsets in the history of the showpiece. Although I was born and raised in New York, I didn’t give the Giants much of a chance against the then-perfect Pats. Good thing I'm a stock picker and not a football handicapper! What the upset did do, however, was remind me of a life lesson learned long ag Expect the unexpected. And it wasn't just the game that demonstrated this. That nugget of wisdom was reinforced to me on two other occasions last week. Here's the story – and what you can learn from it with your own investments... The Housing Slump Is No Surprise... We hear a lot these days about how badly the real estate market is slumping... how homeowners have over-extended themselves and can't keep up with mortgage payments... how foreclosures have skyrocketed and people are losing their homes and investments... how sellers can't sell and have to significantly lower their asking price. With each new set of poor data, the pundits busily start speculating about what it means for the market. Some are even surprised that the situation has spiraled downward to such a miserable extent. But you know what? When the real estate bubble was inflating over several years, there was no doubt that it would eventually pop and the situation would get ugly. I was certain that speculators would get burned and the days of cheap and easy credit would come to a halt. However, the credit contagion is seeping into areas that I did not foresee – and you need to be aware of them in order to protect yourself... ... But The Far-Reaching Effects Of The Credit Crunch Are Springing Some Surprises Surprise #1: It's Not Just Homeowners Getting Hit: One of our favorite medical technologies is the CyberKnife, designed, manufactured and sold by Accuray (Nasdaq: ARAY). The CyberKnife is a cutting-edge radiosurgery device that is able to track any cancerous tumors anywhere in the body, then kill them using non-invasive surgery. It uses powerful, deadly accurate beams of radiation to do this, so side effects are minimal. It's an alternative to traditional invasive surgery that is less accurate and does have greater side effects – and the technology is quickly being adopted across the world. However, Accuray missed quarterly earnings estimates last week and lowered its future guidance because some free-standing facilities (non-hospitals) are having a difficult time getting credit to build the necessary room to host a CyberKnife. In other words, these cancer centers can't get a construction loan. Yes, I expected housing to fall on its face, but I did not expect medical facilities to have a hard time getting loans – especially in a high growth area like cancer. Surprise #2: The Rich Are Impacted, To Although the credit crisis has hit hard, with far-reaching effects, I expected wealthy Americans to be relatively immune from the fallout. However, property values are falling so fast and access to credit is so tight that some are delaying or canceling big purchases or plans. Case in point: We know a couple that got out of the rat race and essentially retired at age 40. They bought a house four years ago for about $850,000 in a wealthy equestrian community and watched as its value surged to $1.3 million. However, our friends recently applied for a home equity loan in order to convert the three-car garage into an office. Their house appraised for just $775,000. Because of the low appraisal, they did not qualify for a large enough loan to undertake their project. So what does this tell us? And what can we do about it? Judging The Length And Scale Of A Recession – And How You Can Profit Regardless Are we headed into an economic recession, or are already in one? I don't see how we can't be when people who want to spend can't do it. And as I said, the effects are far-reaching and hitting all kinds of people and industries. For example, how many contractors won't work just because of the two examples cited above? How many goods and services will those contractors not purchase because they don't have steady work? And on down the line it goes. I've stated here before that I'm a straight stock picker, not a market timer. However, it's not a stretch to see that the stock market has traded in an established downtrend since October. From here, I expect more losses, to the point where it's officially classified as a bear market (when stocks fall 20% from their highs). As for how long it lasts, and how far down it goes, let’s turn to InvestTech Research. The group states that since 1950, the average bear market has lasted 14 months and has sliced 33.5% off the S&P 500. So if the current conditions evolve into an official bear market, we have 10 months and a fall of about 280 points on the S&P left to go before we’re in line with the average bear market. So what do you do now? If you have money in the market that you'll need in the short-term... sell. But given that I'm not an advocate of market timing, you shouldn't have short-term money in the stock market anyway. If you're in the market for the long-term, I actually don't see a reason to panic. In fact, I'd start identifying stocks that you're interested in owning at a lower price, because the chances are you'll get the opportunity. But of course, always remember that the unexpected could happen. Fed chief Ben Bernanke could continue to cut interest rates to zero in a mad, market-rescuing attempt. The S&P could rally all the way up to 2,000. I don't think either of these scenarios is likely. But then again, life has a way of surprising us. Just ask Tom Brady. Good investing, Marc Lichtenfeld
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Today's Smart Profits Notes: - Expect the unexpected: For the first time in almost five years, the U.S. service sector contracted in January – a report that goes some way to explaining why the U.S. economy shed 17,000 jobs last month, since services have fueled the nation's job growth for several months. The reading of 44.6 points on the Institute for Supply Management's (ISM) index was significantly under the 50-point line that separates growth from contraction. The service sector includes businesses like banking, retail, restaurants, travel and construction, but just three areas (utilities, educational services and professional services) showed expansion in January, while 14 sectors declined. Given the stock market's ugly reaction to the report (the Dow, Nasdaq Composite and S&P 500 all sank around 3% on Tuesday), it heightens fears that the U.S. economy is either already in, or is rapidly approaching, a recession.
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