risk

Mid-Day Market News & Commentary by Chris McLaughlin, October 20, 2008
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The US financial markets were in positive territory around noon today. The Dow Jones Industrial Average was up 136.44 to 8988.66 and the Nasdaq was up 11.22 to 1,722.51. The S&P 500 was up 16.80 to 957.35.

Federal Reserve Chairman Ben Bernanke was grilled by members of Congress this morning before the House Budget Committee and signaled that more stimulus might be needed to keep the recession less severe. “With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate,” Bernanke said. The Fed Chairman said that consumers needed access to credit: “If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers.”

US Treasury Secretary Henry Paulson said that the equity stakes the US government has taken in banks “won’t cost taxpayers anything” and might also give taxpayers a nice return over time. The former CEO of Goldman Sachs noted that the government will be receiving a reasonable return on its money and that the banks have a vested interest in paying the government back since the preferred dividend to the government increases over time.

The CEO of Merrill Lynch, John Thain, indicated that the banking industry still has a rough road ahead. “It is likely to take multiple years to repair the damage that has been done… This is not going to get better in three to six months,” he said. Thain said the merger with Bank of America was still on track to close by the end of 2008.

Now on to our real estate investing educational section…

Why the Melt-Down isn’t Done and How Short Sales Might Save your Assets

Common investment wisdom goes something like this…buy a diversified basket of stocks, store a little away in savings and bonds then sit tight for 20, 30 or even 40 years and let the market work its magic. If the past several weeks haven’t demonstrated the folly of this strategy then perhaps it is time to take off the rose colored glasses and face the cold hard facts.

1. For every winner in the market there must be a loser. Plain and simple – the money must come from somewhere. A lot of people “won” big money for many years and now the price must be paid. Beginning with the sub-prime mortgage crisis the Wall Street pundits proclaimed the worst was over only to meet the current liquidity and credit crisis head-on. Unfortunately, the biggest problem of all is still looming in the not so distant future. At 50x’s the size of the subprime mortgage mess, the credit derivative crisis is likely to dwarf everything else to date.

2. Inflation isn’t just predictable – it is inevitable. The Fed has been printing money out of thin air for weeks; money that isn’t based upon production or the exchange of goods or services. Money that didn’t exist just weeks before. Money that will be difficult to repay with a rising rate of unemployment. Money that represents more debt.

3. Risk has reared its ugly head. Although the market supposedly prices risk into the equation on a regular basis, the past few weeks have demonstrated how false that supposition really is; now that real risk has reared its ugly head banks don’t want to loan money and people are afraid to invest. Of course, the longer you hold a stock, bond or even insurance policy the greater the risk. Banks are going bankrupt. Insurance companies are getting bailed-out and trying to time the market only adds risk. On the other hand, buying real estate through short sales utilizes leverage while minimizing risk. You can sell right away, hold and rent, improve then resell or any combination in between.

4. Boomers Want to Cash-Out. Think the stock market is due to a correction then things will get back to “normal”? The Baby Boomers want to cash-out their stocks and bonds in order to begin enjoying the good life and avoid unpleasant surprises like the stock market losing 20 percent in the first few weeks of October. The great sucking sound you hear is the sound of money leaving long term investments and being put into retirement and vacation homes, visits to the grandchildren and a lifestyle they love.

5. Going Global. Capitalism has spread but foreigners are no longer as willing to support our standard of living here in the states at the risk of their own. In fact, they are becoming increasingly non-tolerant of bad debt, a falling dollar and low interest rates on the money they have been loaning us as a nation. Rising interest rates will only make our domestic problems more painful but we don’t dare play too hard or they may just cut our supply line entirely. Either way – the day has come where we must learn to share the wealth…even if it denominated in declining dollars. Get into hard assets while the getting is good. Chances are you will be glad you did for many years to come.

Short Sales Might Save Your Assets

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