Fortune Watch

Every correction is the same, a normal downturn in one or more of the markets where we invest. There has never been a correction that has not proven to be an investment opportunity. You can be confident that governments around the world are not going to allow another Great Depression “on their watch”.

Every correction is different, the result of various economic and/or political circumstances that create the need for adjustments in the financial markets.

While everything is down in price, as it is now, there is actually less to worry about. When the going gets tough, the tough go shopping.

In this case, an overheated real estate market, an overdose of financial bad judgment, and a damn the torpedoes stock market, propelled by demand for speculative derivative securities and Hedge Funds, finally came unglued.

But it is the reality of corrections that is one of the few certainties of the financial world, one that separates the men from the boys, if you will. If you fixate on your portfolio market value during a correction, you will just give yourself a headache, or worse.

Few of the fundamental qualities that made your IGVSI securities sound investments just two years ago have permanently disappeared. We’ll be using credit cards, driving cars and motorcycles, drinking beer, and buying clothes twenty years from now. Very few interest payments have been missed and surprisingly few dividends eliminated.

Only the prices have changed, to preserve the long-term reality of things—and in both of our markets.
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Risk is the probability of loss. It is best to estimate it and to adjust your purchase and sell strategies to it in order to control loss before the purchase is made. Correct timing of purchases, buying near support, limiting loss potential, and stopping the decline by using volatility stop losses are all ingredients of a good risk control system. Let’s look at a few of these loss control discipline components.

One method of controlling risk is by timing purchases so that they occur at or near support. That way, your stop loss can be a very small distance away from your purchase price. If you buy when the stock is 5% above its trendline, for example, it will mean little if the stock declines 5% to reach its trendline. Since stocks often return to support, why would you sell? You would sell only if it broke to the downside through its rising trendline. Therefore, your loss would be calculated by adding the distance the sell point is below the trendline to the distance the purchase price was above the trendline. Buying at the trendline instead of above it would eliminate that unnecessary 5% loss.

However, stocks often make a small temporary penetration through a support line and then resume their climb. When, precisely do you sell? Let us use the suggestions offered in Technical Analysis of Stock Trends by Edwards and Magee as an example. If you are using stops that are based on closing prices, they suggest a trendline penetration of 3% would warrant selling. If your stop loss is placed with a broker, they recommend that the stop be placed 6% below the trendline because of the possibility of inconsequential intra-day spikes. Therefore, if you buy when the stock is 8% above its rising trendline and place the stop loss 3% below the trendline, you will lose 11% before your stop is triggered. On the other hand, if you wait for the stock to return to its trendline before buying, you will lose only 3% if your stop is triggered. It is important to buy right so that you can sell right.
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The near-term outlook for global stock markets is for continued volatility, with little chance of sustained progress until we see an end to corporate earnings downgrades and an improvement in economic leading indicators.

In this note we comment on the problems facing emerging markets, and some broad thoughts on why capitalism remains a reasonable starting point for economic systems.

What is our market outlook?

The threat of a global financial meltdown has diminished thanks to massive central bank and government intervention, which has addressed the liquidity and solvency issues of many US and European banks. However, corporate earnings estimates for 2009 still look too optimistic in light of the poor economic leading indicators that we are seeing, such as consumer and business confidence levels. Therefore, sandwiched between the possibilityof an immediate short-term relief rally and a positive long-term view that equities are currently cheap, we have a near-term view that markets will remain volatile and are likely to trade sideways while the US, Europe and Japan endure a recession.

Emerging markets: the real threat would be a rise in global protectionism.

If the worst is over regarding the US and European banking crisis, it certainly is not for some emerging markets. Hungary finds itselfwith a massively over borrowed consumer sector, with foreign currencyborrowings in Swiss francs and Japanese yen. As these safe havencurrencies appreciate, the risk of widespread default on mortgages and other bank loans increases. The Ukraine economy is coming down with a bump as foreign lenders are put off by 25% inflation. Other emerging markets are suffering from a mix of problems that can include an overvalued currency, excess consumer borrowing (in local and sometimes foreign currencies), falling prices for commodity exports, domestic politics and a drop in demand for exports as the G7 enters recession.
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Though investors have endured some pretty terrible Dow performances in recent weeks, including another 300-plus point on Friday, the downward spiral has not gone far enough to halt trading on Wall Street.

New York Stock Exchange rules currently call for circuit breakers to interrupt trading only in cases of extreme drops of more than 1,100 points. Such breaks, established after the Black Monday crash in 1987, are intended to help investors step back and assess what is happening.

The thresholds for market timeouts are set quarterly, using the Dow’s average closing price for the previous month, and activate in increments of 10, 20, and 30 percentage point drops.

For the current fourth quarter, if the Dow drops 1,100 points before 2 p.m., trading stops for an hour. If such a drop happens between 2 p.m. and 2:30 p.m., trading halts for a half hour. After 2:30 p.m., the 1,100-point threshold expires.

There is also a 2,200-point mark. If the Dow falls by that much before 1 p.m., trading stops for two hours. Between 1 p.m. and 2 p.m., a 2,200-drop causes an hour halt. After 2 p.m., trading ends.

If the Dow falls by 3,350 points, trading stops for the rest of the day.

The circuit breakers have been activated twice, both times in late afternoon trading on Oct. 27, 1997, when the Dow eventually closed off 554 points, or 7.2 percent. Trading that day was halted under previous triggers, which were later revised in 1998. The current triggers have never been hit.
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The torrent of earnings releases set to hit this week could only exacerbate volatility moves, analysts say. Volatility has knocked around stocks on Wall Street in record ways. Buckle up for the coming week.

News and concern over inter-bank lending, credit spreads and declining oil prices, the major averages managed to piece together a strong week that built on the lowest levels in five years.

So far in October, each day the Dow in ranges of no less than 250 points. In fact, the index saw the first 1,000-point swing in its history just over a week ago on Oct. 10. Most of this volatility has been blamed on the liquidation of assets of hedge funds and mutual funds. Rumors of poor performance at major players intensified the effect.

“No doubt the indiscriminate selling we’ve seen has been liquidation, no doubt. Everything is for sale,” says Art Hogan, chief market analyst with Jefferies. Hogan points out that all the indexes have fallen by roughly the same percentage, which indicates that funds are not selling stocks in one industry to invest in another.

The news about the deleveraging of the hedge fund industry is already behind the event, to a certain extent. A lot of hedge funds have a very high level of cash right now. As we come into next week, the question now is whether cash levels are high enough for everyone’s comfort and is the indiscriminate selling is behind us or not, and can we start focusing on fundamentals.
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All that money you’ve lost — where did it go?

Any ideas? Come on lets talk……

Have you ever seen a road accident happen? You must have, since many generally drive like idiots and have a high accident rate. Whenever I see a road accident and later think about how it happened, I can’t help feeling that while most of us drive like idiots, most of the time accidents happen when two idiots do something idiotic at the same time and at the same place. One guy is happily speeding, while trying to read a text message and just then another one in front of him decides to turn right without revealing his intentions beforehand. Either one would have got away but the two in combination becomes an event.

The stock markets are just like that. While one company or one industry may be driven by some particular factor, a prolonged bull market or a bear market only happens when many different factors come together. Sometimes, some of these factors may be related but at other times, they may be unrelated. It could just be a coincidence that they are happening at the same time.

There has never been a correction that has not proven to be an investment opportunity. While everything is down in price, there is actually less to worry about than when prices are historically high. More money has been lost by people who bought into last year’s markets than by those who will buy into this one, at this stage of the correction. When the going gets tough, the tough go shopping.

Every correction is different, the result of various economic and/or political circumstances that create the need for adjustments in the financial markets. This correction is worse than most that I’ve experienced, but the doom and gloom scenarios many have been pushing are unlikely to come to fruition. Once the media elects a new president, they’ll just have to start reporting better news: 96% of all mortgages are current sounds a whole lot better than 20% of all sub-prime mortgages are in trouble.

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The undeniable truth is that making a lot of money doesn’t require a high IQ, either in the market or in business. It takes ruthless disciplined routine, and a focus on doing what is right for the long-term.

You can just feel it, can’t you? People are terrified about how the market has acted over the past month, to be more precise since the last one week. Watch the news — watch if you dare. The “boo-yahs” seem more restrained.

This is the time to buy andd hold on to solid blue-chips. Buy shares of good businesses that generate real profits, attractive returns on equity, have low to moderate debt to equity ratios, improving gross profit margins, a shareholder-friendly management, and at least some franchise value. Everyone is thinking this is a terrible time to be invested. But when everyone is thinking the same thing, no one is thinking much at all. That means ….OPPORTUNITY.

If you have been wanting to change your financial future for the better, then now is the perfect time.  The invetory of cash producing, equity filled homes is at an all time high!  Did you know that most retirees single most lucrative investment during their working years was the home that they lived in.  Imagine if they had bought just one or two more properties (that supported themselves of course) and then retired.

Those are the moments when fortunes are made. You might not recognize it at the time. You might not know it for years. But it’s true. When everyone is down on a stock, or a sector, or a country, you might as well take a look. Usually, the negativity comes with good reason. But the over-negativity can provide plenty of opportunity. It’s been that way forever, and it will always be so.

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Warren Buffett’s Berkshire Hathaway, which has avoided major acquisitions in the financial sector in recent months, may have had a $3.5 billion two-day paper profit on six major banking and financial services investments.

The two-day rally in financial shares, which drove the broad S&P Financials Index 24 per cent, came as the government announced sweeping measures to rescue the financial system and restore confidence in shaky markets.

Shares of Wells Fargo & Company, the fifth-largest US bank and Berkshire’s second-largest investment as of June 30, rose 19pc over the last two days and touched a record high. That would have given Berkshire a $1.85bn paper profit on its reported 290.7 million share stake.

Berkshire would also have had a $1.12bn profit on its reported 151.6m share stake in American Express Company, the credit card and travel services company. Stakes in Bank of America, M&T Bank, SunTrust Banks and US Bancorp also gained value.

Buffett has long favoured investments in undervalued businesses with strong earnings and management. That has helped him transform Berkshire since 1965 from a failing textile maker into a conglomerate with at least 76 companies.

“He’s always felt Wells was very well-managed,” said Frank Betz, who oversees more than $800m at Carret/Zane Capital Management in Warren, New Jersey. “Why does he like banks? Like Willie Sutton said, it’s where the money is.”

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Another crisis unfolding in the US, if this is likely to give you sleepless nights and you ponder on whether to sell or hold on to your equity portfolio, here’s a word of advice. Stay calm and invested, don’t panic and sell.

You don’t incur losses till the time you book them. Equity markets behave in this fashion and investors should take such falls in their stride. If you are a long-term investor, you are likely to get the best returns in such turbulent times.

At such low levels, markets look quite attractive. For investors waiting to venture into the markets, this is an ideal time to average out the cost of purchase. Invest in stocks that are fundamentally strong, preferably in a broad-based index that gives you exposure to large cap stocks. Avoid small or mid-cap companies. But if you lack understanding or don’t have much information, then take the help of professionals or try the mutual fund way.

To start off, one can look at index funds that mirror the movement of an index. Index funds should form the nucleus of your equity investments and other funds should surround it. These funds act as a stabilizing factor in an equity portfolio and should not be always seen as a return-giving factor.

But how about those who are already neck-deep into equities? “Stay invested. Don’t change the investment strategy and keep investing in a staggered manner.”

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