Sushi Money

The past week was the worst ever for stocks in the Dow’s 112 year history with the index falling almost 21% over seven days.  Friday was the eighth down day for the market, unprecedented in scope and duration.   Almost everything has fallen, and there were few refuges for those seeking safety, apart from cash.

“…Until now, the Dow’s worst week was in 1933. Total trading volume of stocks listed on the New York Stock Exchange also hit a record, 11.16 billion shares.”

“The damage has been devastating both to households and to major investment institutions. Investors’ paper losses on U.S. stocks now total $8.4 trillion since the market peak one year ago, based on the value of the Dow Jones Wilshire 5000 index, which includes almost all U.S.-based companies.”

“The blue-chip average is down 40% from last October’s record, its biggest decline since 1974.”

 And that’s the hard part for so many people to understand.  Retirement funds in 401(k)’s and IRA’s are taking an enormous hit, and some folks are throwing up their hands and selling everything.  Think you’re safe with gold?  Not yesterday as gold prices fell Friday after weeks of gains.  

“Gold for December delivery fell $27.50, or 3.1 percent, to settle at $859 an ounce on the New York Mercantile Exchange earlier falling as low as $829. The metal has dropped for two straight sessions, at least temporarily halting a big move upward as investors shifted funds into gold and silver to take advantage of their perceived safe-haven appeal.”

“But as U.S. stocks continue to slide, large institutional investors have been forced to sell gold and other commodities to meet margin calls and other requirements, said Jon Nadler, analyst with Kitco Bullion Dealers Montreal. In a margin call, investors who borrowed money to buy stocks are forced to repay the loans.”

“If stock markets continue their current trend, then there is little doubt that margin call liquidations will continue to negatively impact gold and oil,” Nadler said.

With the wholesale liquidation of stocks and commodities in the market, it also looks like the oil bubble has finally popped.  What does that tell us?  Was there truly so much demand that less than a year ago the price of oil was $147 per barrel with many predicting $200 oil?   And is there really so little demand now that oil is less than $82 per barrel and falling?  

Some are calling it “demand destruction” citing rapidly falling demand for oil by consumers and businesses in recent months.  But the credit crisis has exacerbated the impact of corporations and traders who would borrow money to purchase oil contracts.  However you look at it, speculation and the unwinding of large financial institutional bets in the commodities sectors have played a large role as well.  Have you seen the prices for corn or soybeans?  All down sharply.  

The good news, at least for now, is that gas and food prices should not be rising significantly over the near term, and many prices may fall.  I was looking at the price of three-dozen eggs at a big-box store the other day.  Last year the price rose from $2.99 to $5.99 presumably based on fuel costs.  The price is now down to a more reasonable $3.59 for those same three-dozen eggs.

Not only has the money flow dried up in many areas, consumers are also tigtening their wallets in response to the financial crisis.  All of this has a compounding effect, at least for a while.  My concern however is what happens next?  A few months down the road after this “unwinding” and liquidation of assets by the large institutions, will we face renewed pressure on the prices of goods and services? That’s the view of Jim Rogers and others, citing a pending “inflation holocaust.”  For the short term however, it would seem the threat of slower economic growth is of greater concern than the threat of inflation.

The more important question for many people right now is “What to do?”   That’s a question that every investor, or their financial advisor, must try to answer and to understand the longer term implications for their clients’ goals.  Many of us believe the government is making progress and that with time and increased capital, the markets will stabilize.  How soon that takes place is anyone’s guess.  

There are advisors recommending “sell” and others saying “stay put.”  A bold few are actually buying in the market, picking and choosing among beaten down stocks at bargain prices.   Personally I took the opportunity to sell some losing positions, and reallocate that money among some of those bargain stocks.   In my IRA I sold a portion of a conservative mutual fund to reallocate that money in a growth fund that had fallen sharply.  Am I early?  Maybe so.  We may yet see weeks more of losses, but it’s a bet I’m willing to take with money I won’t need for a decade or more.

I don’t believe the nation is headed towards depression-era times, but we obviously have many challenges ahead.  Some think it could get a lot worse, and it’s worth looking at What History Tells Us About the Market.   Reading that article is a sober wake-up call to how bad it was, and how bad it could be.  For now most of us are just watching, dazed and wondering when it will all turn around.

“The entire nation, it seems, is in the grip of what psychologists call “the disposition effect,” or an inability to confront financial losses. The natural way to palliate the pain of losing money is by refusing to recognize exactly how badly your portfolio has been damaged. A few weeks ago, investors were gasping; now, en masse, they seem to have gone numb.”

But amidst the financial carnage, we also hear what may be the siren song that the other side of crisis is opportunity.

“This collective stupor may very likely be the last stage before many investors finally let go — the phase of market psychology that veteran traders call “capitulation.” Stupor prevents rash action, keeping many long-term investors from bailing out near the bottom. When, however, it breaks and many investors finally do let go, the market will finally be ready to rise again. No one can spot capitulation before it sets in. But it may not be far off now. Investors who have, as Graham put it, either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it.”

History tells us that people tend to buy at the highs, and sell at the lows.  We may not be quite at the lows yet, but selling now is basically the same thing.  If we’ve learned anything in this market it’s that the word “risk” doesn’t mean what we thought it did.   We’ve now discovered how sensitive we are to seeing portfolio losses when the downside really hits.  Risk tolerance has changed for many of us, and a whole host of moderate and aggressive investors are now joining ranks with their conservative peers. 

If you’re dollar cost averaging with retirement funds, or 401(k) contributions, I would certainly continue to do that. The market may trend lower in the months ahead, and dollar cost averaging works in your favor. But my standing philosophy remains:  Cut spending, Pay down debt, and Increase savings.  Focusing on those three things is a prerequisite to financial stability.   If you’ve got those three things under control, then continuing to invest, or increasing investments is worth considering.

How long will it take until we see traction and more stability in the financial markets?  I think it will be weeks rather than months.  However long it takes, I am unapologetically optimistic about the nation’s future and the future of our free-market economy.   Hang in there, and have a good weekend.

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