Thursday, September 25, 2008

US Congress Bails our Canadaian Investors [Yeah, sure...]

US Congress bails out Canadians’ RRSPs. [Yeah, sure…]

No one loses money because of what they know: what hurts them is what they don’t know. Doesn’t this seem like a perfectly logical statement?

This is the sequence of events that illustrates what you and the experts don’t know:
Summer 2007. The stock market sold off sharply from mid July to mid August. The news related to the U.S. subprime mortgage fiasco and the downturn is U.S. home prices.
January 2008. The stock market sold off sharply as we learned that the problem was much worse than we had thought. Many non-U.S. banks were holding billions of dollars of investments backed by worthless morgages.
March 2008. The stock market sold off sharply again. The mortgage/real estate problem was so bad that a major brokerage firm had failed.
July 2008. The stock market sold off sharply again. The situation was worse than they thought: two huge U.S. mortgage corporations had failed and needed the government to bail them out.
September 2008. The stock market sold off sharply again. The problem is so bad that one more giant brokerage firm failed and another had to be bought out. And now the U.S. government is contemplating backing hundreds of billions of dollars of these junk-mortgage-backed investments.

Do you see the pattern? It’s not about what they know, it’s about what they don’t know. And every time the experts learn more about the unknown numbers in this mysterious mortgage-monster problem, the stock market goes lower.

Our assumption was that we only lose where we don’t know. But it’s not true, is it?

We DO know that the US junk-mortgage problem is worse than they thought. We DO know that US house prices are in a tail spin. We DO know that the stock market has gone lower and lower every time some new financial crisis surfaces. Yet, in the face of all these “knowns,” we continue to hold onto our stock portfolios. And we continue to lose. Why is this?

The reason most investors and their advisors continue to hold on to their losing positions is not logical, it’s emotional. It’s financial shell shock.

Our expectation is that our investments should go up in value: but this past year has not delivered on our expectation. And now, investors and their advisors are in shock, frozen in inaction. In full knowledge that the U.S. government is required to bail out the U.S. financial system, they remain frozen. And every month it’s getting worse. Fear and dissapointment have replaced logic.

How can we protect ourselves from further loss? We simply sell our stocks. We stop relying on the U.S. government to bail us out: we bail ourselves out. Then we can stay frozen in disbelief without losing any more money in our RRSPs.

Wednesday, September 17, 2008

September selloff ended today [Sept16,08]

September Selloff Ends

For now, it looks like the selling is over, having ended between 2 and 3 o’clock today.

The key occurance was the final flushing of finacial stocks out of the large pension plans and mutual funds. These mega-investors found themselves in an awkward position last year at this time. The summer 2007 selloff came with a warning about subprime mortgage woes: but the mega investors were seriously over invested in bank stocks and mortgages. Their systematic selling program began.

And, this afternoon, those selling programs were mostly completed. The next few days should give us the final verdict: can the stock market move up from here?

Here is an observation on both the Canadian and US markets:

The Facts: The financial news in September was even worse than in July. In July, we were worried that Fannie and Freddie were in trouble. In September they actually had to be bailed out. In July we were worried that Lehman and Merrill were in trouble. In September, one was bought out and the other went under.
The Emotions: In September, investors were more worried than they were in July. Would the US financial system hold up?
The Prices: The financial stock indices held well above their July lows even though Lehman Bros. went bankrupt. In spite of the extra bad news in September, the financial stock indices did not sell off to new lows. And, today, the selling abated and the buying came back. The crisis appears to be over.

There is a divergence between investor emotion and price. That’s what happens at the bottom.

Caveate emptor: this argument is the logic that tells us a short term stock market bottom occurred today: but, in the financial world, anything can happen. Good luck.

Investing by "feel."

“Feeling” your way in investing. September15, 2008

When you woke up this morning and realized that two of America’s biggest brokerage firms were in serious trouble, two of her biggest mortgae companies had to be bailed out last week and foreign stock markets we down sharply, how did you feel?

Was therea bit of urgency in your attitude toward your investments? Was there a bit of adrenolin in your blood as you checked your portfolio? Did you finally decide to sell some of those dogs you had been hoping would come back?

Whenever an economic shot is fired across our bow, it makes us nervous. And nerve is an important feature of the stock market. Let’s review the first two weeks of September to see if we can find a clue about when the sell-off will end.

The first week, the TSX dropped about 5%. The market opened higher on the Monday morning, and then dropped another 5% by the close Tuesday. Do you remember how that felt?

Now try to remember how you felt Monday morning, September 15. Was there a bit of panic? Did you feel worse about the market on September 15, or a week earlier, on September 8?

Most of us felt significanlty worse on “Lehman Brothers Day” than a week before when the FED bailed out Fannie Mae and Freddie Mac. We felt worse, but the market did not drop down past its recent low.

This sets up a divergence between market sentiment [our feelings] and market price [the objective reality of the market]. This divergence is bullish. The market is nearer a bottom now than it was last week.