Are we standing on a cliff?

By: ispeculatornew
Date posted: 10.02.2009 (5:00 am) | Write a Comment  (0 Comments)

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01-standingIt brings back bad memories for most us… a day in October where stock markets fall, the Vix (volatility index) explodes, investors jump towards treasury bonds and banks come out with gloomy prospects.. October started one day ago and yet it seems like we’ve all lived this. Of course, last year was perhaps the worst period for most investors as uncertainty about the stability of the US economy brought the stock market to major lows.
Unfortunately, some believe we are headed right back there. The main arguments are:
-Last year’s problem are not resolved resulting in a weak economy that is unable to create jobs fast enough to get back to full employment
-The housing market collapse is much more important than previously
-Deficits by the US government signal long term problems for the US and world economy
-That the US and Europeans financial systems are on the verge of a major collapse

Honestly, I can see how most of these points do make sense. There are obviously many problems right now and the Fed remains overwhelmed in a sense. Watching the VIX rise by 10% as well as rumors of some investors buying puts on the S&P are putting back some fear in the markets. However, I do not believe that we are heading back towards another blood bath. While there remains much to be done, I think it’s easy to become dramatic.
Fact is that it is difficult to time the market and I know a few investors who have been out of the market since January. They had the chance to miss a huge stock market rebound as they continue to wait for a 2nd market crash. I don’t think we’re heading there! Companies like AIG, Goldman Sachs, Citibank are still leveraged but they are much healthier than they were a year ago and the government has a much better grip on what is going on. Remember that when the crisis hit with Lehman Brothers, almost every investor was caught by surprise and truth be told, we all learned a lot, especially about illiquid investments and extreme leverage. I do believe that we unfortunately will forget most of those lessons.. but in less than a year? Not so fast…
Instead of staying completely out of the market, I would personally prefer investing in assets that would perform well in a more difficult environment, such as health care companies as well as certain technology companies. Next week, I will give out 3 stocks that I believe will do well in the coming weeks/months. We’ll see and hopefully I can do as well with those picks as I did in our stock picking competition.
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