Best of Show Editor's Note

08/16/2007 12:00 am EST

Focus: MARKETS

Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

August 16, 2007

Well, here we are again! Howard is basking on the shore, while I sit, glued to my computer, wondering just what the heck this market is up (or down) to!

As I write this, we are very close to square one—we have almost given up the entire gains for the year on the Dow Jones Industrial Average, the S&P 500, and the NASDAQ.

The markets are very near closing at a 10% decline from their 52-week highs of mid-July.  That 10% is an important number as it signifies a market correction, which many on Wall Street have been reluctant to forecast.

And the reason for that is simple: once investors have that ‘correction’ mindset, it is sometimes a self-fulfilling prophecy that drives us into a full-fledged bear market.

In previous bull markets, we could have taken some comfort in knowing that if we corrected, many other markets around the world would often take up our slack. But that’s just not true any longer. Global markets have become so correlated and interconnected, that the rest of the world is suffering right along with us.

European shares fell to a five-month low this morning, and Europe’s benchmark index (FTSEurofirst 300 index) has now declined 10.6% since attaining a 6 ½ year high on July 13. Even the emerging markets are being hit. Stocks in Turkey, Brazil, Argentina, South Korea, and the Philippines suffered steep losses.

Anyone who has not been hiding under a rock for the last month or so, is aware that there are several culprits beating up the market.

The subprime debacle has created a situation of super-tightening credit conditions, sending borrowers—consumer and corporate—unable to find needed cash.

The deteriorating credit markets have possible vast repercussions. Today, the biggest US mortgage lender—Countrywide Financial Corp. (NYSE: CFC)—reported that it had to borrow the entire $11.5 billion authorized under a bank credit line to fund its operations. That’s a significant amount of money, and believe me, Countrywide will not be the only mortgage lender running short on funds.

Several hedge funds are also in need of some serious band-aids. Already, two funds run by Bear Stearns have sought bankruptcy. And others like Goldman Sachs, Highbridge Capital Management, D.E. Shaw, and AQR Capital Management have been hard hit.

Now, subprime problems have spread to the commercial paper market (short-term securities), with Standard & Poor’s ratings agency warning of possible downgrades.

Then, we have the housing woes.

According to the National Association of Realtors (NAR), sales of existing homes fell in 41 states from April-June and home prices declined in one-third of the metropolitan areas surveyed. The states hardest hit by declining sales: Florida and Nevada, down 41.3% and 37.5%, respectively. No surprise to me, as a handful of my friends in Florida have been trying to sell their homes for 1 ½ years, with no luck. And, when I was in Las Vegas for the recent Money Show, local headlines proclaimed, “Las Vegas: Highest Foreclosures in the Country”.

Today, the Commerce Department also weighed in, with its dismal statistics on housing starts. In July, the annual pace was 1.381 million, lower than the 1.405 million forecast by Wall Street, as well as the upwardly revised 1.470 million from June. We haven’t seen new housing starts this low since January 1997’s 1.355 million units. Housing starts were at their weakest in the South.

It’s the worst housing slump in 16 years.

However, the NAR did find some glimmer of light. Prices were up in 97 (or 65%) of the 149 areas surveyed, compared to last year’s prices, an improvement over the results of first quarter’s survey, when just 55% in the survey reported higher prices.

And the Commerce Department reported that housing starts in the Midwest actually rose by 2.6%.

But—those stats bring just a tickle of optimism. In reality, the news is frightening enough on the borrowing side of the equation, but unfortunately, it also has a far-reaching affect on the stock market—as we have seen.

Nothing seems to be immune, including commodities—often a safe haven in a tumbling stock market. Marketwatch reported that gold futures tumbled more than 3% today, while silver dropped almost 10%. Copper fell by 8% and palladium was off 6%.

Investors are running for cover, buying Treasury bills as fast as they can get their wallets out. According to Bloomberg, the yield on treasuries fell 54 basis points to its lowest since 2005, and the largest decline since 1989, when the Dow dropped 6.9%.

So, where does that leave the individual investor?

The answer is simple: stay with quality. If you have invested your portfolio in strong, high-quality, fundamentally well-run companies, just keep calm and keep your money where it is.

I speak with many other advisors daily. We’ve been in this business a long time, and have seen many, many market cycles. Listen, the market will spring back. It may not be tomorrow, or Monday, but you are going to waste a lot of money if you try to time it. Study after study shows that individual investors are the worst market timers; they inevitably get out of the market at its lowest and buy into it at its highest.

And most heartening of all, most of my advisor colleagues (as I do) believe this is a short-term phenomenon. So, just stay cool, stick to your solid investments, and know that this, too, shall pass.

Enjoy your weekend!

Comments? Please email us at TopProsTopPicks@InterShow.com

Nancy Zambell is Best of Show editor for MoneyShow.com. The opinions expressed here are hers alone and do not necessarily reflect the views of InterShow.
 

Related Articles on MARKETS