|Portfolios 2007||Dec 29||Mar 27||June 28||July 20||July 27||Aug 10|
The current sag in all five portfolios reflects what the press has been saying for several weeks.
For example a New York Times article today entitled: “Mortgage Losses Echo in Europe and on Wall Street” by
Vikas Bajaj and Mark Landler says:
“Turmoil in the home loan market ricocheted from the United States to Europe and back again yesterday as stocks on Wall Street suffered their biggest one-day decline since February, reflecting growing concerns about tightening credit worldwide. Big losses on packages of American home loan securities sold to investors turned up unexpectedly in French and Dutch banks yesterday, adding to worries at hedge funds and financial institutions around the globe. With trillions of dollars of securities outstanding, those announcements raised expectations that more problems may soon emerge in other unlikely places as well.
“The spreading fears forced the European Central Bank and, later, the Federal Reserve to inject billions of dollars into the financial system to help prevent borrowing and lending in credit markets from freezing up.
“ Japan ’s central bank followed suit, injecting more than $8 billion into money markets as stocks there plummeted Friday morning. Indexes fell more than 2 percent across Asia in early trading Friday, and the Morgan Stanley Capital International Asia Pacific index, a key regional index, was down 2.9 percent by midmorning in Tokyo .
“In a statement that could further fuel the sell off, Countrywide Financial, the nation’s largest mortgage lender, said after the United States market closed that the debt markets were “experiencing unprecedented disruptions” that could hurt its profits and financial health. The company said it planned to hold more loans on its own books because investors were not willing to buy them. But it noted that its capacity to do so was “not unlimited.”
This flies pretty much in the face of President Bush’s comments yesterday featured in USA Today which said: “President Bush said Wednesday that financial markets will be able to work through current turbulence without torpedoing the economy, calling the business environment sound.”
We each have to decide who we believe, George Bush or the numerous government actions and the markets.
We have learned twice in the last two years that no matter how much one diversifies, there is no protection from a total economic crash.
This could be a momentous time either up or down. We’ll learn a lot as we track the portfolios over the next several weeks. Stop losses are definitely great, but the market has taught us many lessons about bailing out at the first whiff of trouble.
I recall a New York Times best selling book written in 1992 written by Harry E. Figge Jr. and one of the country’s esteemed economics professors, Gerald J. Swanson entitled “Bankruptcy 1995: The Coming Collapse of America and How To Stop It.” This book told how US Federal debt would create a huge economic crash in 1995. The book sold millions of copies and many of us (including yours truly) shook in our boots. The lesson learn was that the sky was not falling. 1995 was the beginning of the biggest stock market boom in recorded history.
Then I remember Y2K. A reader sent me a note yesterday telling me how much he had lost because he had invested everything based on his expectations of a huge crash in 2001.
Then we gained a similar lesson in 2006 when markets almost everywhere boomed from October 2005 up to March 2006. Then in a similar scare markets almost everywhere corrected and dropped harshly from March 2006 through October 2006.
Yet those who held on were well rewarded.
The Emerging Asian Portfolio rose +75.19% from October 2005 until March 2006. Beginning in March 2006 the second worst emerging market plunge of the decade began. The Emerging Asian Portfolio dropped to 30.28%.
Investors who believed in the idea and held on, or had a money management systems that cut losses but reinvested when the idea turned around, were well rewarded. The Asian portfolio rose 83.88% from July through October, 2006. In three months, the $300,000 portfolio gained $251,640, a 151.64% profit on their $100,000 base investment in three months!
Again earlier this year markets dropped, but only shortly. Those who jumped out were whipsawed and spent some money on fees and lost recovery if they jumped out too soon.
Now we must ask, will this third market scare in two year be the big long term drop or not.
One other lesson we need never forget is that these huge injections of billions of dollars by governments will create more currency instability. The dollar has been the weak kingpin recently. We can now see from the slight drop in the Dollar Short Portfolio and Dollar Neutral Portfolio that nervous investors may make the mistake (my opinion) of jumping back into the greenback.
Let’s keep our eye on the dollar short portfolio and see if the market suddenly agrees with me. It is fool hardy to suddenly trust the greenback just because there are troubles elsewhere. If you jump out of a frying pan into a fire, this does not mean that back into the frying pan is where you should jump next.
If loans are bad and if real estate values have dropped, the reality of that money (if the money existed in productive real terms) will be diminished. Governments can cover up this fact with a flood of liquidity. That cover up comes from the printing press or more ruinous borrowing. The reality of the loss will be revealed to us through the whispers of inflation.
Interesting times, whether this means great opportunity or the Chinese curse are upon us so stay alert. Certainly do no panic. Consider stop losses to take advantage of the really great gains you may have. Most of all be true to yourself. Let your financial plan work for you and your situation. Let your personal circumstances dictate your decisions not sudden fluctuations in the market.
Until next update, good investing!
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