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Stock Ideas Investors Daily Edge Another Day, Another Government Intervention
Stock Ideas Investors Daily Edge Another Day, Another Government Intervention 
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| Another Day, Another Government Intervention |
| Friday, 10 October 2008 | ||||||||
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The past few weeks have all felt the same. Once I leave my house at 8:45 AM, I stop by Dunkin Donuts for my morning iced coffee. While I am there, I always take a look at their TV to see what’s going on. Luckily (or unluckily, I can’t decide) the TV is always on Fox Business News. Let me show you how the ritual goes (before I show you some recent bits of feedback). I get in line and wait for my delicious iced coffee (extra cream, 3 Splenda’s and hazelnut flavoring). I look at the TV. And then I see that the headline on Fox has something to do with either the Fed… or the Treasury creating some new tool to “fix” the economy. I then ponder the implications of the government’s “fix” until I get to bed that night. Half the time, I can’t even enjoy the first gulp of my iced coffee, because I’m simply too transfixed on the economy. The entire day is spent stressing over questions like… Will the market like this move? What could the Fed do next? What does this mean to the money supply? Have we reached a bottom because of this? And how long will it be until it takes effect? Maybe You Feel the Stress Too I don’t blame you if you do. The Dow Jones has dropped nearly 35% in just 12 months. Every sector of the economy has felt it. It doesn’t matter if you were invested in commodities, consumer staples, income bearing stocks… nearly every single stock in this market has taken the equivalent of a super drop-kick to the jaw. Over the past few weeks, friends and family that I haven’t talked to in years apparently searched their entire old, dusty rolodex’s looking for my phone number so they could ask if their retirements were in danger.
One family I know decided that they didn’t want to go through the pain of even looking at their retirement accounts. They wondered if they should pull their money out now. Maybe they should’ve done that in January… An old high-school friend I recently became reacquainted with marveled out loud at how cheap stocks really were. He says he’s never seen GE as cheap as it is. I told him if he thought stocks were cheap now, then he’d really love the fire sale we’d see in a few months. Sure, the P/E (price-to-earnings) of the S&P 500 index is at epic lows, but here’s the kicker: As the E part of the P/E ratio disappoints investors over the next few quarters, the P part of the ratio will need to move lower for the stock to remain “cheap”. If prices stay the same, the P/E ratio will move higher, making stocks more expensive. So why is my hair turning white? Because I am fed up with the daily interventions we’ve been seeing. And what really gets me aggravated is the fact that all of these interventions are supposed to be looked at as a positive thing. Why would anyone view these developments as positive? After all, why would the government intervene unless there was trouble? More importantly, why would they intervene every single day of the week if the economy weren’t in real BAD shape? It seems the market looks at it like “well, thank god the government is doing something!” With as many interventions as we’ve seen, they might as well be saying, “maybe this one will do the trick!” Over the past few weeks I’ve discussed what ails the markets, and received a lot of feedback like this one from John M… Excellent description of the current conditions in which we find ourselves. It's amazing what greed and lots of leverage can cause. And Bruce M… You are a very bright man, and right on the money. I had the same discussion with a local banker the other day. It just isn't in the mindset. Then there were responses that criticized the whole reserve system like this one from George M… Good article, but a $2BB loss doesn't pencil out to a 20BB actual loss, it just means there is less to loan out at the same leverage level. The leveraged amount is shrinking faster than they can "create" new "money." What a cruel joke fractional reserve banking is, especially on the receiving end. And then I received a question from Anders W… In your article of 'Staying Short in the face of a shrinking Money Supply' dated Sept. 30, you mentioned 'the evaporation of credit will take money out of our money supply'. My question to you is can the Fed print enough money to make up for this evaporation? Or are they cutting down the printing to boost the dollar when the market is hoarding for cash worldwide? Good question Anders. Let’s first understand that while the Fed has some control over money creation, they don’t have as much control as people think. There isn’t a printing press in some dusty, back office room where money is created. Money is created when the Fed lends to banks in hopes they use that money to lend to the public. Right now, the Fed is loaning as much as they can to banks. But the problem is that banks aren’t using it to lend money to you and me. So long as they cut back on loans, the money supply continues to shrink (or stay flat). And so long as those bad assets on the books of banks around the world remain illiquid, they will have a hard time finding the courage to lend (not that I blame them, in fact, I encourage them to be cautious for once in their existence). That’s why the Fed has tried new things everyday this week to try and calm the markets. Last Friday it was the bailout and the market nearly crashed. On Monday, they increased lending to $900 billion. When that failed to work, they said on Tuesday that they’d start buying up funds in the commercial paper market (the market that is currently locked-up). When that didn’t work, they coordinated an interest-rate cut with six other central banks. And when that didn’t work, earlier today they mentioned that they might take ownership positions in banks to recapitalize them. Soon enough I bet we’ll see the Fed start lending to states so that they can continue to fund their governments. Massachusetts and California are both very interested. With all of this said, we won’t begin to feel the effects of these Fed moves overnight. It’s going to take a few months. And until then, the economy will continue to deteriorate. It appears there is no quick or simple solution, but eventually we will make it out of this ready to ride the next major bubble. Stay safe, Charles P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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