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MAKING CENTS OUT OF THE NEWS
Blog #14
(October 16th, 2008)
PRAISE THE LORD AND PASS THE AMMUNITION
By Tom McAllister, CFP™
No doubt about it now, I’m afraid. It’s here, that dreaded recession on which we wasted so many TV sound bite minutes and so many miles of newsprint, asking “Will we or won’t we?” The government's recent moves will, hopefully, make this a milder recession than it might otherwise have been. Meanwhile, it’s time to step back and analyze all that’s happened in recent weeks and where we go from here.
Last weekend, the world’s major financial powers agreed to invest directly in troubled banks. In other words, governments, on our behalf, became stockholders in banks so that banks, in turn, would be in a position to lend cash to businesses. The initial reaction of the stock market to this move was explosive; in about eight hours of trading, markets rose 11%, recovering half the prior week’s sickening losses in eight hours of trading. (Unfortunately, profit-taking and fear subsequently undid most of the gain.)
In addition to infusing capital into banks, the “fix” effort addressed those two
“rules gone wrong”
that both Steve Forbes and I had pointed out as contributing to the crisis. The SEC lifted the onerous “mark to the market reporting rule” and temporarily suspended short sales on many financial stocks. These two steps went a long way towards stopping the hemorrhaging of banks’ capital positions.
But…damage has been done. Our politicians’ failure to see the critical need for immediate action eroded foreign confidence in U.S. leadership. More important, the end result of the massive intervention will surely be an increase in inflation. Yet I can see two factors that can help keep that inflation in reasonable check: the drop in oil prices and the very high inventory of unsold residences.
As I observe the events of the past few weeks, I continue to be astounded at the many investors who follow their fear and sell at the bottom. As I pointed out in
“Flight – Or Fight?”
, we’re programmed for survival against physical dangers and we inappropriately respond to all threats with fear. As a forty-six year veteran of the world of investments and investors, I know only too well that allowing one’s emotions to drive investment timing is a sure path to horrible results.
As foxhole wisdom has it, we should “Praise the Lord and pass the ammunition” Today the ammo is all around us in the form of bargains in quality, high-dividend paying common or preferred stock and tax-free municipal bonds. Emotions are running high, and that’s natural. Prayers and praise, in my book, are always a good thing! But, I urge all investors to ”pass the ammunition” by putting at least part of their investable funds under experienced professional management. Our legislators, in my opinion, failed us by not acting with alacrity and decisiveness. Let’s not, as individuals, make the same mistake.
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