About a year ago, I sounded the alarm just days after the Dow Jones Industrial Average made a new all-time high. I entitled the newsletter “Man Your Battle Stations.” In that newsletter, I envisioned (actually, all anyone can do is make an educated guess at best) a very sharp sell-off and suggested holding no equities except those related to precious metals. (Since then, mining shares have been killed, proving I put my pants on one leg at a time, too, and those speculators who only buy those stocks are likely not sending me anything for Christmas). But, if you followed my advice back then, the lion’s share of your capital would have been in cash, so the metals hit should not have been as devastating (unless you’re a gold bug, hello).
Widespread losses of anywhere from 25 to 50% or more are not uncommon. Certain sectors like the financials, housing and the like have been hammered and have even seen the wipe out of a company’s entire equity. While that is not likely to continue at the same pace, it is still far too early to go back into the water. Investors should remain on the sidelines for the most part and only peek out of their fox holes as we get closer to 10,000 on the DJIA.
Calling All Buyers
There are enough fundamental problems in the stock market to last for quite a while, but one that hardly gets any play these days is the great wealth transfer. Nearly 80 million Baby Boomers have begun reaching retirement age and these folks were going to sell their equities and move into fixed income or the like creating a bonanza of business opportunities (at least that’s what was hailed within the financial services industry). Also, these folks had financial plans (my readers already know why I don’t believe traditional financial planning doesn’t work, and this is living proof) that had assumed rates of returns in the 8 to 10% range. Not only have these Baby Boomers not seen such a return in years, but they are now facing a two-headed monster: falling equity prices and far lower fixed income rates of return. In addition, those in the work force under age 65 are in it up to their necks, trying hard to stay afloat, and are in no position (don’t have the disposable income) to take these shares off the Boomers’ hands even at today’s prices. This will be another weight on the stock market for a considerable period ahead.
Points of Interest
• The FDIC problem list of banks spiked 30% in the past quarter. Banks remain off limits still in my book (but can become buying targets down the road). Unless many white knights come riding to the rescue, banks in general will likely have to dump assets to maintain satisfactory capital levels for regulators and creditors. Commercial banks are likely reluctant players as this unfolds. Keep in mind that on average, commercial banks attempt to hold about $1 of capital for every $10 of assets they own (investment banks are about $20). Another big loss this quarter or next could see large scale fire sales once again.
