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Financial Crisis

"Round Two" Survival Guide

Thisbearmarketisnowherenearover.SinceitsMarch10lowof666in2009,theS&P500rallyhasbeenalmostunstoppable.Punditsandmediacommentatorsalikehavetakenthistomeanthatthebearmarketisoverandthatstocksshouldonceagainbetheprimaryassetclassforinvestors.Noneofthemknowswhatthey’retalkingabout.Overthelast30years,theUShasbuiltuprecorddebtsonapersonal,state,andnationallevel.Consumersthoughttheywerefinanciallystablesolongastheycouldcovertheinterestpaymentsontheircreditcards,statescreatedprogramafterprogramfewifanyofwhichtheycouldafford,andtheFederalGovernmentissued$30‐50trillionindebtandliabilities(countingSocialSecurityandMedicare).Thisallcametoascreechinghaltwhenthehousingbubble(arguablythebiggestdebtbubbleinhistory)implodedin2007.Sincethattime,stockshavestagedoneoftheirworstyearsonrecord(2008),oneinfiveusmortgageshasfallenunderwater(meaningthemortgageloanisworthmorethanthehomeitself),andsometrillionsinUShouseholdwealthhasevaporated.Theseissuesseemtobedistinct,butinrealitytheyallstemfromadebtproblem.Andasyouknow,thereisonlyonelegitimatewaytodealwithadebtproblem:Payitoff.However,insteadofdoingthis,theFeds(theFederalReserve,TreasuryDept,etc.)havebeenproducingEVENMOREDEBT.Here’sabriefrecapoftheirmovesthusfar:

•

TheFederalReservecutsinterestratesfrom5.25‐0.25%(Sept’07‐today)

•

TheBearStearnsdeal/Fedbuys$30billioninjunkmortgages(March’08)

•

TheFedopensvariouslendingwindowstoinvestmentbanks(March’08)

•

TheSECproposesbanningshort‐sellingonfinancialstocks(July’08)

•

TheTreasurybuysFannie/Freddiefor$400billion(Sept’08)

•

TheFedtakesoverAIGfor$85billion(Sept’08)

•

TheFeddolesout$25billionfortheautomakers(Sept’08)

•

TheFeds’$700billionTroubledAssetsReliefProgram(TARP)(Oct’08)

•

TheFedbuyscommercialpaper(non‐bankdebt)fromnon‐financials(Oct’08)

•

TheFedoffers$540billiontobackstopmoneymarketfunds(Oct’08)

•

TheFedsbackstopsupto$280billionofCitigroup’sliabilities(Oct’08).

•

Another$40billiontoAIG(Nov’08)

•

TheFedbackstopsup$140billionofBankofAmerica’sliabilities(Jan’09)

•

Obama’s$787BillionStimulus(Jan’09)

•

TheFed’s$300billionQuantitativeEasingProgram(Mar’09)

•

TheFedbuying$1.25trillioninagencymortgagebackedsecurities(Mar’09‐’10)

•

TheFedbuying$200billioninagencydebt(Mar’09‐’10)

•

CashforClunkersI&II(July‐August’09)Andthat’saBRIEFrecap(I’msureIleftsomethingout).Inanutshell,TheFedshavetriedtocombatadebtproblembyISSUINGMOREDEBT.They’repumpingtrillionsofdollarsintothefinancialsystem,tryingtopropWallStreetandthestockmarket.They’vemanagedtokickoffarallyinstocks…ButtheyHAVENOTADDRESSEDTHEFUNDAMENTALISSUESPLAGUINGTHEFINANCIALMARKET.StocksareheadedforanotherCrash,possiblyasbadastheonewesawinOctober‐November2008.Asyouknow,thatCrashwipedout$11trillioninhouseholdwealthinamatterofweeks.There’snotellingthedamagethisSecondRoundwillcause.TheFedshavethrowneverythingthey’vegot(includingthekitchensink)atthefinancialcrisis…andthingsarefundamentallynobetterthantheywerebefore:mostmajorbanksareinsolvent,oneinfiveUSmortgagesisunderwater,andthestockmarketisbeinglargelyproppedupbyin‐housetradingfromafewkeyplayers(GoldmanSachs,UBS,etc).Makenomistake,wearerapidlyheadedforuglytimesinthefinancialmarkets.ThetimetoprepareyourselfisNOW!AndI’velocatedseveralinvestmentsthatwillnotonlyprotectyourportfolio…they’llalsohelpyouturnaprofitwhenthis“houseofcards”wecallamarketrallycomescrashingdown.I’vedetailedalloftheminthisreport,

The



FinancialCrisis“RoundTwo”SurvivalGuide.

TwoWaysStocksPay:InflationandDividends

Beforewegetintothespecificinvestmentsuggestions,it’simportanttotakeabigpictureofstocksasanassetclass.Thecommonconsensusisthatstocksreturnanaverageof6%ayear(atleastgoingbackto1900).

However,astudybytheLondonBusinessSchoolrecently

revealedthatwhenyouremovedividends,stocks’gainsdroptoamere1.7%ayear(evenlowerthanthereturnfromlongtermTreasurybondsoverthesameperiod).

Putanotherway,dividendsaccountfor70%oftheaverageUSstockreturnssince1900.Whenyouremovedividends,stocksactuallyofferLESSrewardandMOREriskthanbonds.Ifyou’dinvested$1instocksin1900,you’dhavemade$582withreinvesteddividendsadjustedforinflationvs.amere$6frompriceappreciation.SoasmuchastheCNBCcrowd(andoutserialbubbleblowingFedChairmanBenBernanke)wouldliketobelievethatthewaytomakemoneyinstocksisbuyinglowandsellinghigh,therealityisthatthevastmajorityofgainsfromstocksstemfromdividends.Theremaininggainshavecomelargelyfrominflation.BillKing,ChiefMarketStrategist

M.RamseyKingSecurities

recentlypublishedthefollowingchartcomparingREALGDP(lightblue),GDPwhenyouaccountforinflation(darkblue),andtheDowJones’performance(black)overthelast30years.Whatfollowsisaclearpicturethatsincethemid‐70sMOSToftheperceivedstockgainshavecomefrominflation.Whichbringsustotoday.Accordingtoofficialdata,theS&P500iscurrentlytradingataPricetoEarnings(P/E)ratioof20andyields1.7%.Inplainterms,stocksareexpensive(historicaverageforP/Eis15)andpayinglittle.Inotherwords,thereislittleincentive,otherthanfutureinflationexpectations,forowningstocksrightnow.

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Category:	Business/Law > Finance
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Upload Date:	06/19/2011
Copyright:	Attribution Non-commercial
Tags:	financial crisis phoenix capital financial crisis phoenix capital (fewer)

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