What
Are You Waiting For?
When presented
with concerns about the stock market, investors many times claim
to be able to know when to get out of the market or an investment
just at the right time - at the top. Whether it is arrogance, ignorance
or greed that makes them believe this, I will leave up to the Dr.
Phils of the world to figure out.
What I do know
is that the market does not ring a bell at the top. It does not
give everybody a chance to get out all at once. The doors to get
into the market are very wide. What most investors don’t know
is that the doors to get out are very narrow.
Wise investors
see warning signs. They see major cracks in the fundamentals and
act before the crowd. Key point – they act BEFORE the crowd.
Since the exits from the market are narrow, when the crowd tries
to exit all at once, they get stuck, jammed and hurt, badly.
How do you know
what the warning signs are?
Warnings abound
today, just as they did back in 1999. The warning signs are what
told us at Cornerstone to get investors out of the market back in
1999. But Wall Street kept investors in by telling them “you
can’t time the markets,” and “you are a long term
investor.”
What are the
warning signs? They have been in the headlines for months.
Low cash positions - Huge earnings losses - Sub-prime mortgage mess
- Dollar collapse - Commodity spike up – Gold’s spike
- Market spike (yes a market spike up is in and of itself a warning
sign) - Bond market decline – Oil nearing $100/bbl –
Housing market collapse… and on and on.
The Dollar is
collapsing because of low interest rates in the US, too much debt
and too much currency floating around the globe.
The bond market
is declining because of the fear of rising inflation. This is because
of the Fed lowering rates and the rise in commodity prices. (See
below)
Commodities
are rising because global demand is pushing prices higher. There
is nothing the Fed can do about that. They can raise rates, lower
rates or change them to blue, and it won’t make any difference
to how much oil China or India consume. 
Gold is up for
two reasons. The first is inflation and the second is the declining
Dollar. Or maybe it is the other way around. It doesn’t matter.
(For those of you that care which is first, I don’t.)
The stock market
is up because… Earnings are great? No. The economy is humming?
No. The Real Estate debacle is over? Ha! Hardly! No, the stock market
is flirting with new highs because….
I can tell you
the simple answer is that there are more buyers than sellers. That
is true. Understanding why they are buying is like trying to figure
out why a kid puts his hand on a hot stove after you have warned
them not to.
Follow me here,
this is going to bend your brain especially if you are a died-in-the-wool,
I’m never gonna sell my stocks (or mutual funds) kind of person.
Being as honest
with yourself as you can, what do the other markets know that the
stock market doesn’t? All the other markets are acting like
a recession, (with inflation), is coming like a freight train. Yet
the stock market seems not to notice.
Or better, what
does the stock market see that the other markets are missing? The
other markets are pretty well linked together. The Dollar’s
decline is irrefutable. The advance of Gold and other commodities
is obvious. These occurrences lead to higher inflation and economic
slowdown.
The average
bull will tell you the market is going up in response to the Fed’s
lowering rates. Excellent. A well thought out answer. Wrong and
uninformed, but exactly what Wall Street wants
you to believe.
Before we explain
why the answer is wrong, a few more questions to ponder. Do lower
rates help or hurt a declining dollar? (Hurt) Do lower rates stifle
inflation or ignite it? (Ignite) Do lower rates help cool off the
foreign demand for commodities? (No) Do lower rates increase the
money supply and debt outstanding or decrease it? (Increase)
So if lowering
rates hurts the economy in so many long term ways, why is the stock
market going up? Wall Street and the market are populated with monatarists
that believe lower rates are a cure-all for everything. They are
wrong. (See our article “Money,
Money Everywhere” for more info on this.) It is our belief
that the Fed is acting very short term. They are only looking out
for the next few months, trying to put a band-aid on a very serious
problem. “So what if lowering rates today hurts the economy
long term, let that be the next guys problem.” is the
Fed’s attitude, we believe.
But too many
of the variables (that lower rates will impact) are out of the Fed’s
control. We think the danger is now and the Fed has little they
can do to prevent the inevitable economic and market declines.
Wall Street
got it wrong by ignoring the warnings of 1999, should we expect
anything different this time?
And what are
you going to do about it for yourself? Will you continue to trust
Wall Street after they missed the warnings in 1999?
This is not
something you have to do alone. This is one of the worst myths Wall
Street ever drummed into investors, that they can do it themselves.
Most investors can’t. Unless you or your broker have hours
and hours of time each week to do the necessary research and the
understanding of complex asset allocation models and theories to
implement the appropriate strategies, you are likely to miss the
warning signs and not know the suitable plan to utilize.
The idea that
investing is simple and all you have to do is pick a few good funds
and let nature take its course is a marketing ploy. It isn’t
true. Investing in today’s world is complex and needs constant
supervision and adjustments. It requires a flexible strategy and
hours and hours of research. It takes patience, timing and a clear
focus on the fundamentals. It requires an expertise, experience
and wisdom that few possess.
This is what
we at Cornerstone do for you when we manage your portfolio. We implement
a plan that has a proven track record. We monitor your performance
and actually make changes as needed.
We have a clear
understanding of what the markets are doing and are focused on the
major macro trends. We adjust the portfolio to not only avoid the
warnings, but to take advantage of them.
We also have
exit strategies for investments. We know what we are looking for
ahead of time, so little surprises us. Our management style is pro-active,
not re-active.
If this is the
type of money management you are looking for, give us a call.
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