Generation Y Investor » Financial Crisis

October 2009 Is Eerily Similar To October 2007

Stephen Kline — Mon, 19 Oct 2009 23:19:55 +0000

Those who don’t learn from history are doomed to repeat it, that’s how the old cliché goes. As the major stock indexes continue their march higher, some find that these iconic words of caution are particularly relevant in our current environment. The argument can be made that the fundamentals unfolding presently are uncannily similar to those of October 2007 when the market topped out and went on to plunge 50%.

From Minyanville: October 2007 Shows Us How This Rally Ends

“I reexamined the bubble peak of October 2007 and “surprise, surprise” — it’s déjà vu all over again. If you recall, in October 2007 the US dollar was tanking and oil was ripping higher. The talk was about how the dollar had nowhere to go but down.

Sound familiar? It should because the dollar is tanking again and the talk is how the whole world is turning away from the dollar as the world’s reserve currency. Gold today is also making new highs just like it was back in October 2007, on the back of a weaker dollar.

The stock market in October 2007 was making new highs as the dollar tanked. It feels like déjà vu to me because today we have the dollar tanking, oil and gold breaking out, and stocks making new yearly highs.”

I posted these thoughts not to scare anyone, but to remind us not to be complacent. It’s perfectly fine to enjoy the fruits of the recent rally; however, with each upward tick of the Dow and S&P 500, I see more and more people who seem to be forgetting the lessons 08/09 should have instilled in them. Remember to stay humble… for if you don’t, the market will do it for you.

Schiff Makes Roubini Look Like An Optimist

Stephen Kline — Wed, 02 Sep 2009 02:31:41 +0000

As if I haven’t hit you with enough bearish posts these past few days, here’s one more for you from the ultimate bear himself… Peter Schiff. If you don’t know who Schiff is… you should. Schiff is one of the only people to call foul when the sub-prime boom was in full swing. Economists and commentators laughed at Schiff’s predictions of doom in the housing market and overall economy. Schiff was a little early with his calls but he was eventually proven right on everything he said.

Here he is in an interview taking the most negative stance I’ve seen of any market commentator. His statement about the real economic crisis being in front of us and not behind us is particularly chilling…

How Long Will This Rally Last?

Stephen Kline — Sat, 22 Aug 2009 15:01:03 +0000

The markets have been in a sustained rally since hitting the March lows. Since that time, the S&P 500 has climbed more than 50% from the bottom. While we’ve seen some noticeable improvement in the economy since than, there are still many ominous signs that make me weary.

Firstly, second quarter earnings were largely viewed as a success. The majority of S&P 500 companies managed to beat analyst’s earnings estimates. This is a good thing. However, the majority of these earnings beats were due to cutting costs rather than better than expected revenues. All in all this isn’t necessarily a bad thing, provided that top-line revenues begin to increase in the upcoming months. If revenues don’t begin to increase, than one had to question how long firms can continue cutting costs to drive earnings.

My second reason for being cautious right now is the high degree of bullishness on the housing market. Recent data has indicated home sales have increased significantly month over month and many have claimed that the housing market is beginning to bottom out. This bullishness seems unwarranted to me because only the low priced homes are seeing an increase in sales/price (think foreclosures). The mid to high end of the housing market is still stagnant and prices have nowhere to go but down.

Another reason to be bearish on housing is the first time homeowners credit. Towards the peak of the housing bubble our country saw the greatest percentage of Americans in history own their own home. Put in a different perspective, we had the fewest percentage of potential first time buyers in history because everyone who wanted a home had already purchases one. Yes there is a good portion of people right now who were/are looking to purchase a home. However, most of these people are rushing to close on homes right now in order to take advantage of the government credit.

At first you may think this is a good thing. But in reality all the first time buyers credit is doing is front-loading all the potential demand for housing that’s left (aka stealing from future demand). I wouldn’t be surprised to see housing take another leg down starting in November/December after the credit has ended and demand from first time buyers wanes. (Note: A similar argument can be made about the cash for clunkers program front-loading demand for new vehicles).

My final reason to question the extent of this rally is that it’s being fueled largely by hedge funds and institutional buyers who are being forced to buy stocks because they were under invested at the bottom. When you’re running a hedge fund or mutual fund your investors are always comparing your returns to those of other hedge funds and mutual funds. Therefore, if you were sitting in cash and missed the huge rally since March you’re going to desperately try and catch up to your peers who have benefited from the rally.

So despite some improvement in the economy since the lows, I still feel the need to advise caution. I wouldn’t recommend selling all your stocks and hiding under your bed. Just as I wouldn’t recommend jumping full steam onto this rally. Make sure you have a proper asset allocation that matches your risk tolerance. Also, take a look at your current asset allocation and make sure it’s inline with your target allocation. The big rally of the past few months may have caused your portfolio to become over-allocated towards stocks. If this is the case, rebalance your portfolio by selling some stocks and buying bonds or redirect new contributions into your fixed income investments.

Above all, remain vigilant and cautious about this or any other rally in the stock market. Remember, risk goes up as stock prices increase. Don’t become complacent.

California’s Budget Crisis… A Preview of America’s Future?

Stephen Kline — Fri, 03 Jul 2009 23:12:48 +0000

In case you haven’t seen, yesterday California declared a fiscal state of emergency. Governor Arnold Schwarzenegger aka… The Goverator, has stated that he will not sign any legislation not related to the budget until the crisis is resolved.

In the video, Schwarzenegger complains that the California politicians are busy discussing important topics such as “Cow Tails” instead of addressing the situation. If you haven’t already lost your faith in American politicians take a gander at the video.

The state will begin printing IOU’s this weekend and will be distributing them out to individuals in lieu of actual income tax return checks. If this can happen to our largest state, is a federal government crisis not far behind?