I know three months remain in 2008 and a lot more market turmoil is ahead of us, but at the risk of jumping the gun I’d like to offer my nominees for Chumps of the Year.
“There’s more distressed debt trading right now than at any other point in history,” says Keith Fitz-Gerald in Money Morning. Nearly $184 billion worth. Based on historical precedent, Keith says this means we could be in for a record number of bankruptcy filings – “including some of the biggest corporate bankruptcy filings in history.”
Quality leaves a trail of accomplishment. Somehow– we must believe — it’s possible to tell companies that will do well and fly right from those that won’t. That’s the only rational reason to choose stocks. So smart investors look for key information—the bits that predict where to find the winners.
There are a lot of scared investors out there right now. That’s why gold prices closed up $70 yesterday and US stocks got slammed.
However, Oxford Club investment director Alexander Green says allowing fear to dictate your investment decisions is asking for trouble. This credit crisis looks like it will be extremely painful, but the worst thing you can do now is panic sell. If you investing in solid companies, they will still be solid companies when this crisis is a distant blip on the radar.
Instead, investors need to stick to a simple plan: Buy quality, diversify assets broadly and think long term.
Dave Gonigam says the Fed’s rescue of AIG (NYSE:AIG) is just the tip of the iceberg. “The 80% stake that Uncle Sam is taking in AIG is a whole lot of garbage the Fed might have to print money to cover – $85 billion. But it’s pocket change compared to the potential closure of 1000 banks (Wilbur Ross’s estimate) or 4500 banks (Ken Lewis).
The US House of Representatives has just passed legislation that lifts the ban on offshore oil drilling. This opens up most of the US coastline to exploration. Individual states now have the option to allow drilling between 50 and 100 miles off their shores. The problem is offshore drilling is unlikely to solve America’s energy crisis. According to the government’s own report, widespread offshore drilling would result in a price reduction of perhaps “two-tenths of one cent 18 years after drilling begins.”
Despite the chaos on Wall Street, the Fed yesterday left its benchmark interest rate on hold at 2%.
Martin Hutchinson says the Fed has finally starting doing its job: putting price stability over Wall Street’s demands. Real interest rates are negative. This is feeding inflation. It also means Treasury bond yields – also currently below the rate of inflation – are too low and should begin to rise again.
Martin says investors can profit from this situation with the Rydex Juno Inverse Government Long Bond Strategy (MUTF:RYJUX).
One man’s loss is another man’s gain. Jason Simpkins reports that Barclays PLC (NYSE:BCS) is buying up the ‘healthy’ remains of Lehman Brothers (NYSE:LEH) at bargain prices, expanding and diversifying its operations in the process. Meanwhile, Goldman Sachs‘ (NYSE:GS) Q3 earnings were dreadful but still beat analyst expectations.
Looking for an accurate credit crisis forecaster? Look no further than Merrill Lynch’s chief investment strategist, Richard Bernstein. I’ve followed his warnings since 2006 about housing and his track record is pretty stellar. Bernstein is still pretty bearish on the overall economy. He agrees with me that the next phase of the credit crunch will spread to consumer loans.
With all the deal brokering the Fed is managing right now, they seem more like a real estate agent than a quasi-government entity. The Fed is supposed to help manage the economy, but they keep applying band-aids to the problem. Encouraging one troubled financial institution to sell to another troubled financial institution is not a long-term solution.
