One of the greatest sins made by investors is to fall in love with a stock. They mistakenly think that their favorite company will defy the laws of gravity and outperform their respective sector. The fact is that markets don’t lie. They efficiently discount all the information pertinent to the stock. The wise investor listens to what the market has to say about that particular security and reacts accordingly. The smart move is to respect the markets and not to fight it.
From an investment point of view, 2008 was a painful year for most. The major North American stock indexes were down approximately 40%. In hindsight, we had an asset bubble fed by easy credit. Strong economic growth lasted too long, creating too much excess in the system. Billionaires were sprouting up like mushrooms. To create long term balance for the economy, we needed a recession to get rid of excess capacity. Because we did not have a recession in a while, the economic correction is much more severe. We were also very greedy, causing us to ignore risks.
The major US stock indices such as the S&P 500 had a terrible 2008, dropping around 40%. With a lack of confidence in the world’s banking system and a slumping economy, investors ran for safety. As a result, the US dollar surged and the 10 year US treasuries saw its yield drop to as low as 2.03% this year. The highest it went this year was 4.32%. The yield is currently around 2.13%. As investors become more comfortable with assuming risk, they will shift their money to corporate bonds and equities. The 10 year yield on these notes are expected to climb to the mid 3% range as the financial markets stabilize. This should be good news for stock prices.
According to the The Wall Street Journal report on Monday, citing an analysis by the bank’s restructuring advisers, Lehman Brothers Holdings Inc’s emergency bankruptcy filing could have destroyed as much as $75 billion of potential value for creditors. The resulting failure of Lehman sparked a credit crisis and massive selling of stocks. In hindsight, the Fed should have bailed out Lehman. With the US quickly falling into a deep recession, the Federal government will have to spend hundreds of billions of taxpayers’ money to shore up key industries and stimulate the economy. Bailing out Lehman Brothers would have been cheaper and less tulmutous.
When times are tough, even eggs are not spared. Cal-Maine Foods Inc posted a 32 percent drop in second-quarter profit, dragged down by falling demand for eggs in the institutional and food-service sectors. According to the CEO, the weaker sales to the egg-products industry reflected a slowing economy and credit challenges for the importers of dried and frozen eggs around the world. Looking at the charts, CALM could be building a base between its 52 week low of $20.75 and $30. If the $20.75 level holds, it would be an opportunity to scoop up the stock and sell it at a higher price. The stock is likely settling into a range as the economy tries to find a bottom.
As 2008 winds down, it is a year that many would want to forget. The destruction of wealth from the turmoil in the capital markets and huge job losses have put a huge crimp on people’s sentiment. After years of strong growth, the economy is cleaning out its excesses. Easy credit has led to a bubble in various asset classes. The purging is never the less painful and a lot of people are hurt in the process. Given the severity of the pullback in the capital markets, we are more than halfway through the economic contraction. Once the market forces balance itself out eventually, the economy will come back. Happy holidays to all.
First the financial institutions got a bailout, next was the auto industry. The federal government is setting a precedent to help incompetent executives pull their bacon out of the frying pan. Now, the commercial real estate industry is the latest to seek some sort of a government bailout. If this group gets approved, there is no doubt that other industries will also be lining up. The harsh reality is that easy credit created a bubble within the economy. We need to go through the painful process of working off the excesses.
At just over $54, PEP is not that far off from its 52 week low of $49.74. The yearly high is $79.79. Even in this economy, PEP is still managing to grow profits. It is expandng through acquisitions and boosting its international operations. PEP is not just a beverages company, they also have snack foods and fast food operations. For the investor looking to stash their money in the consumer staples group, Pepsi offers attratctive valuations, a dividend yield of over 3% and growth prospects.
After Madoff’s alleged Ponzi scheme that bilked investors of $50 billion, the hedge fund industry might finally come under government scrutiny. With so many investors seeing massive losses on their hedge funds, they will demand some form of regulation. Hedge funds can no longer be secretive about how they manage money using their secretive proprietary trading strategies. If they want to attract clients, they will need to be under government regulation. From the investor’s point of view, better to have more modest returns in exchange for better preservation of capital.
For the fifth time in three months, China is lowering interest rates after their major export markets such as the U.S., Europe and Japan collapsed due to the recessions there. The fourth largest economy in the world could only see growth in their GDP of just 5%. The Chinese government’s goal is to generate growth of 7%. In order to maintain social stability, they need to create 10 million jobs annually. The risk for China is that huge job losses, particularly caused by the closing of factories, could lead to social unrests. With their huge manufacturing capacity and dropping input costs, China will remain a major exporter of deflation.
