Tuesday, December 16, 2008

Frightening Market Predictions and How I'm Reacting

8 really, really, scary predictions by Fortune offers some doom and gloom from some leading economic and investing experts. Overall, these experts believe 2009 will be a very bad economic year, where many investments will be risky and one should preserve capital and be safe. I quoted some of the summary points from the article in the bullet points below.

  • Nouriel Roubini, NYU economics professor - "For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cashlike instruments such as short-term or longer-term government bonds. It's better to stay in things with low returns rather than to lose 50% of your wealth. "

  • Bill Gross, bond mutual fund manager - "Investors need to recognize these titanic shifts in market and public policies and be content with single-digit returns in future years. ... Above all, stick to high-quality companies and asset classes. The road to recovery will be treacherous.

  • Robert Schiller, Yale economics professor - "But after the stock market crash of 1929, the price/earnings ratio got down to about six, which is less than half of where it is now. So that's the worry. Some people who are so inclined might go more into the market here because there's a real chance it will go up a lot. But that's very risky. It could easily fall by half again."

  • Sheila Bair, FDIC chairman - "We need to return to the culture of thrift that my mother and her generation learned the hard way through years of hardship and deprivation. Those are lessons learned that the current crisis is teaching us again."

  • Jim Rogers, commodities investor - "In my view, U.S. stocks are still not attractive. Historically, you buy stocks when they're yielding 6% and selling at eight times earnings. You sell them when they're at 22 times earnings and yielding 2%. Right now U.S. stocks are down a lot, but they're still very expensive by that historical valuation method. The U.S. market is yielding 3% today. For stocks to go to a 6% yield without big dividend increases, the Dow will need to go below 4000. I'm not saying it will fall that far, but it could very well happen. And if it gets that low and I'm still solvent, I hope I'm smart enough to buy a lot. The key in times like these is to stay solvent so you can load up when opportunity comes."

  • John Train, investment advisor - "In the present environment I favor companies that can prosper in the lean years ahead. So, not Saks, but Wal-Mart; not Neiman Marcus, but Dollar General. Or specialists, such as Fastenal, Monsanto, or Schlumberger. And when should you buy? In or near what I call the Time of Deepest Gloom, if you can spot it."

  • Merideth Whitney, bank analyst - "I think the overall economy will be worse than people expect. The biggest issue will be consumer spending. If 2008 was characterized by the market impacting the economy, then 2009 will be about the economy impacting the market. It's already started. "

  • Wilbur Ross, billionaire - "If President Obama promptly and decisively resolves these problems, whether or not he adopts my recommendations, and restores public confidence, he can end the recession by early 2010. If not, the economy will languish for a long time."

  • Some investors might see the overwhelmingly bearish sentiment as a sign the market is near the bottom. However, I think there is some merit to their forecasts. Therefore, I am not adding any new money to invest and am hedging with some inverse ETFs, in case the market falls further. At this point, I will continue to stay invested with what is already in stocks, but trim as much as 33% to be reinvested later, either after a market decline or rise.

    Disclosure: At time of publication, I own shares of Monsanto and Wal-Mart in a managed account and Monsanto in a trading account.

    For more on Ideas You Can Use, check back every Tuesday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

    1 comment:

    Mark said...

    I think that's a smart way to play this market. I am trading inverse ETF's while I wait for the overall market to turn