Ten observations about this financial storm

By Michael Cintolo | September 17, 2008 | Last updated on September 17, 2008
5 min read

(September 2008) History in the making! Granted, it’s not the kind of history we’d all like to see, but the fact remains that the upheaval in the financial world during the past few days — in stocks, bonds, currencies, and, oh yeah, in the real world as well — is going in the history books. We’ll be reading about this stuff for years to come.

As always, we want to keep you in gear with our latest thoughts, so I decided to jot down a few quick notes about what I see — call it a stream of consciousness.

(1) It’s during these tumultuous times that investors seem to throw out all the stuff they’ve learned in recent months. I’ve already answered emails from subscribers who want to buy, buy, buy, and those who are actually shorting into this disaster. In other words, the news and volatility makes people want to be involved.

But oftentimes the opposite approach is best. Right now, I’m sitting in cash, avoiding the market’s mayhem, and, importantly, keeping a level head so that if the market happens to form a bottom, I’ll be able to recognize it.

(2) While it seems like today’s the end of the world, it’s not. We’re in the midst of a bear market, and obviously, the financial system is being tested. While there are going to be plenty of losers, our economy is actually hanging in there relatively well — I’m not saying things are good by any stretch, but I’m almost surprised that the Dow and S&P 500 aren’t down more given all the woes. Many sectors, such as retail and medical, are actually growing nicely.

(3) Monday, as the Dow and S&P 500 broke below their mid-July lows, there were 792 stocks on the NYSE that reached new 52-week lows. That’s far fewer than the 1,304 seen in mid-July… a positive divergence, something usually seen at major lows. Of course, Tuesday morning opened ugly as well, so we’ll see if this divergence holds.

(4) Echoing that point, I can say that, as opposed to mid-July, when I couldn’t find a single stock that I really wanted to buy, today I’m closely following a list of 10 good-looking stocks that are, even after Monday’s disaster, holding very well. And these aren’t “defensive” names like Colgate or Philip Morris; they’re real growth companies that are showing big increases in sales and earnings right now. I find that encouraging.

(5) I believe the effect of this financial mess is emphasizing the bear trend in commodities — slower economic growth/ higher uncertainty/ less liquidity means less money will flow into commodities. Looking at oil, natural gas, gasoline, and gold, they’re off 37%, 48%, 31%, and 21%, respectively, just since early July. Those seem like abnormal drops to me, not normal corrections. While sharp rallies will come, a meaningful top might have finally been put in. Translation: Don’t buy commodity stocks (even gold) as a “hedge” against this uncertainty.

(6) Another area I remain worried about: Nasdaq 100-type stocks, especially the big winners of the last advance. Apple looks like it’s completing a very long, very sloppy topping pattern, First Solar is in the same boat, and stocks like Baidu, Dell Inc., Cisco, and most chip stocks are looking terrible. I don’t see this group leading if a new bull market gets underway in the weeks ahead.

(7) Always remember that defense is a necessary part of the investment ballgame, especially with growth stocks. As of last night, I see that Calamos Growth Fund is down 25%, CGM Focus is down 18%, Fidelity Growth & Income is down 29%, and many hedge funds are down 20%+… with some already folding up shop. A 20% drop in your portfolio requires a 25% advance just to get back to where you were; a 30% drop requires a whopping 43% advance to get back.

As one subscriber said, “it’s all about advancing, and protecting.” Too many people forget the second part of that. Cabot Market Letter, which I edit, has been 65%+ in cash since early July, and has been 90% cash during the last couple of weeks. You can time the market and avoid situations like these!

(8) As for the real world… I’m glad to see the government draw a line in the sand with Lehman, allowing it to fail. And, yes, I know someone who works there, and one of my best friends works at Merrill Lynch, and I feel awful that the average employee is getting whacked like this. Still, bailing out everybody was just prolonging the agony, and besides, the Federal Reserve is there to be lender of last resort. I’m not so sure Lehman was suffering from just liquidity issues — they had a ridiculous amount of terrible debt, so they were likely going the way of the dodo bird eventually.

Lastly on this topic, I think Bank of America is going to be a monster when this storm passes. And I will also say that the best-acting financial stocks, like Hudson City, Northern Trust, and Wells Fargo, should thrive whenever this mess ends. Keep them on your watch list.

(9) As someone who’s very early in the process of looking for his first house, I would love to be able to take advantage of these plunging mortgage rates. So if you’re tied up in a higher-rate mortgage, this market turmoil, which has caused a rush to safety, could be presenting you an opportunity to refinance.

(10) To re-answer a question I’ve heard many times: Could this bear market just keep going and going for months? Yes, it could — anything is possible in the stock market. But the market is an odds game, and when you’re 11 months into a bear market, and fear is elevated, and nearly a quarter of all stocks are hitting new yearly lows, the odds favor this bear market being in the seventh, eighth, or even ninth inning here.

It’s not a prediction, but I’ll just say that the time to become truly bearish was weeks and months ago (when our indicators turned bearish), not today. That doesn’t mean the market’s going to turn around here, but when worry and panic are in the air, the smart professionals keep their eye on the ball, look for those stocks holding up best, and remember that a new bull market will eventually come, and those that are prepared will make the most money. In the meantime, I’m patiently waiting in cash.

Michael Cintolo, Vice President of Investments for Cabot Heritage Corporation, Analyst and Editor of Cabot Market Letter and Cabot Top Ten Report

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Michael Cintolo