Effor.com

I’ve got a lot more to say, but I was reading a story on the NY Times and this caught my attention:

“It’s like having a fire in a cinema,” said Hyun Song Shin, an economics professor at Princeton. “Everybody is rushing to the door. You are rushing to the door because everyone is rushing to the door. Clearly, as a collective action, it is a disaster.”

When there’s a fire and everyone is rushing to the cinema exits, you have a choice:

A) Join the crowd trying to get out.

B) Stay behind and get burned.

Which do you think is the correct course of action?

Personally, I choose “C” which is to leave when I smell smoke in order to beat the rush when everyone else finally sees the fire.  That’s why I got out of the stock market last year in June when the first reports of this financial meltdown started appearing.

I read into it, looked at the skyrocketing bankruptcy rates (and used a little common sense regarding what that would do to the financial institutions that invested in the toxic crap) and made the decision to get out.

If you stayed in the market, you’re probably down about 20% (or more) right now.  But guess what?  You could get out now and avoid another 20 to 30% in losses.  Despite the market surge today, this is far from over.  Think the 3rd inning of a 9 inning game and you’d be in the ballpark.

gk

I wonder how Doug Kass is feeling about this advice he gave on Jan 14th?

http://www.thestreet.com/s/kass-katch-buy-the-financials-yes-buy/newsanalysis/investing/10398482.html

Yup, you read that right - he said to “Buy the Financials. Yes, Buy”.  Since Mr. Kass published his story on the 14th, the Financial Sector Index (XLF) is down more than 8% - and it was down 10% at one time Friday.  I may be wrong (I often am!) but I don’t think buying on the 14th would have been a good idea….

I think it’s waaay to soon to be looking at this sector.  Personally, I think we’ll see a couple of big bank failures before the financial house of cards has collapsed fully.  No, I don’t know who it will be, but I do know that you don’t make money in the long run by borrowing money (especially at today’s higher rates) to pay down debt.  Eventually you run out of willing lenders (can you say credit crunch?) and you have to face the music.

Banks and other lenders have been putting off the inevitable for quite awhile, and they may be able to postpone it a bit longer, but borrowing from Peter to pay Paul still works the same way it did 100 years ago.  It doesn’t.  Infusions of capital from the Middle East, reductions in the Fed Funds Rate, and issuing corporate bonds simply makes the eventual crash worse.

In my humble opinion, we’re heading into a very rough period for almost all asset classes, but “soft” things like made up financial assets and corporate profits (measured in the dollar) will fare much worse than “hard” assets, such as commodities.  Another 20% to 30% decline from here is not out of the question, so sell some stocks and put the proceeds into simple money market funds or commodities.  In other words, it’s time to keep your powder dry (conserve your capital) so you can afford to pick up some bargains when this train wreck is over.

gk