Markets in a Nutshell
November 17, 2008 Issue
"Joe Investor, the Markets Are All Yours Now." This the title from Jason Zweig's Wall Street Journal article (11/15). Zweig goes on to explain that virtually every investment that carries risk is on sale. Zweig says that while blue chip stocks are still cheap, other investments have also become cheap as institutions such as hedge funds, foundations, and state pension funds are forced to sell assets to meet margin calls (many of these institutions used heavy leverage or borrowed money to make investments over the past few year and now are forced to pay it back). Here are 3 investments that are in bargain territory (besides U.S. stocks):
1. Corporate bonds- top quality corporate debt is yielding 7% and more and for those willing to take bigger risks, lower rated corporate debt is yielding 14-15%.
2. Emerging markets- emerging markets (such as China, Brazil, India, Malaysia, Turkey) are down 60% in 2008 and are in bargain territory.
3. Real Estate Investment Trusts (REITS)- Zweig says with a 40% drop this year, prices are at levels as if people will never want a roof over there head again.
"Just Say No to Detroit," and "Free to Fail," are just two headlines I have seen over the controversial plan out of Washington to bail out the U.S. automakers. Barron's (11/3) calls it part of "The Bailout Economy." The fate of the automakers (and all the attendant related businesses that service the big 3) is a tough issue. From a social and political perspective, millions of jobs are at stake. From a free market perspective, propping up failed businesses stalls innovation and hurts long term economic growth. I do know this. Just pouring taxpayer dollars (which is really starting to add up) to keep the autos (or any industry) operating is not a good long term solution. And it begs the question, "Who is next?" Should the retail industry, suffering its worst period in decades (some will go bankrupt), get taxpayer money?
Who do you think are some winners from the economic downturn? (Every downturn creates opportunity). The 11/13 Investors Business Daily names Dollar Tree, Family Dollar, and 99 cents only as companies who are benefiting as shoppers go "downscale."
One likely positive outcome of this tough economic correction is a movement back to savings in this country. Although the negative savings rate (meaning people were spending more money than they made) reported in the last 5 years was artificially low (due to non-inclusion of retirement money such as 401k's), it still was lower than historical measures. According to Investment News, the savings rate went below zero in 2005 after being about 8% in the early 1990's. While we won't approach savings rates of emerging economies (like China with their 40% savings rate), a return to the 7-10% rate (which was the range from the 1950's-early 1990's) is reasonable.