Profit from the Market Meltdown
September 22, 2008 – by Richard Band
Without a doubt, investors are left shaking their heads with more questions than answers with all the news coming out of Wall Street these days. Has the market finally bottomed? Are my investments safe? What is the proper portfolio balance for my portfolio in today’s shaky financial times? All good question investors need answers to in these uncertain times!
Have We Hit a Bottom?
I have to say that the news background is certainly appropriate for a major market bottom. I have never seen such extreme negative news really in my working lifetime (and I’ve been working in the financial field for more than 30 years).
Without question, last week’s events were the worst I’ve ever seen: The failure of a major investment banks and followed the same week by the virtual bankruptcy of the largest insurance company in the world, to say nothing of what happened just a couple of weeks ago when Fannie Mae (FNM) and Freddie Mac (FRE), the big mortgage packagers, being seized by the Federal Government (“Fannie-Freddie Bailout: What It Means to You“). So from my point of view, the recent news has been about as bleak as you would ever find it at a major market bottom.
The good news is that all of the technical evidence points to strong stock market bottom now, which are:
- High put/call ratios
- Strong oversold readings on volumes
- A large number of new lows, and
- Stocks hitting new 52-week lows for the year.
Of course, it takes sellers to push a market down, but it also takes buyers to bring the market back up, and the encouraging thing there, I believe, is the liquidity factor.
We have huge balances sitting on the sidelines in the form of money market instruments, people who have moved out of the stock market and have been waiting for an opportunity to put that cash back to work. Money market reserves as a percentage of the market, of the stock market capitalization, now stand at an all-time high. So, there’s plenty of liquidity there to move the market back up if people can get over their fears and if they can begin to see some sort of resolution to the problems we’re facing.
How Can I Tell If My Investments Are Safe?
This seems to be the question of the month for many investors!
For banks, it’s relatively easy to tell if your bank (and your deposits) are safe. One way is to go to bankrate.com which, like Morningstar, uses a simple five-star method of evaluating banks. Then look for a three-star rating or better. I also recommend that you try to stay below the FDIC limit of $100,000 per depositor or $250,000 for IRAs—that way you know you’re insured and your money is safe (see also, “3 Simple Steps to Protect Your Money“).
Speaking of insurance, again, you want to stay within reasonable limits. I would not want to hold … an annuity policy that had a face value of more than $100,000. I’m talking now about fixed annuities, not variable annuities, but a fixed annuity that is an obligation of the insurance company. Try to keep those down to $100,000 per insurance company, because that’s the limit that the state guarantee funds in all 50 states will cover (see also, “Avoid Market Chaos with Annuities“).
With regard to your money market funds, it’s a lot tougher to tell whether they’re “safe” or not. One thing I recommend doing is to go and check the fund’s prospectus or the most recent report to shareholders. If you find a lot of names in there of financial institutions that you have heard of in the news you might consider going to a different money market fund.
What Should I Be Buying Now?
Believe it or not, there are sectors that have caught my attention in these bleak financial times. Here are three of my favorites now:
Utilities: Some of the best buys for conservative investors right now are located in the utility sector. This is a sector that, historically, has provided great defensive characteristics, and right now, the utilities are somewhat on the cheap side.
FPL Group, Pacific Gas & Electric, and Duke Energy are three of my favorites. FPL is more of a growth type of utility. It’s the largest producer of wind power in the United States. The dividend yield is a little lower than on Pacific Gas & Electric and Duke Energy. It’s only about 3.2% whereas you’re getting about 4% with Pacific Gas and 5% with Duke Energy. Remember, in the utility field, the lower the dividend yield, the greater the capital growth and the greater share price appreciation you can look forward to. FPL is my buy for growth investors, Pacific Gas for the middle-of-the-road investors, and Duke Energy for people who are approaching or are in retirement.
Telecoms: I’m also fond of the telecoms right now, specifically, AT&T and Verizon. These are companies that pay good, solid dividends, and both have increased their dividends in the last 12 months. Right now, both stocks are They’re yielding about 5% or more, and are selling at extremely low P/E ratios. In fact, AT&T is only nine times estimated earnings for 2009. So, this is not an expensive company. Verizon sells for a little bit more, but there’s a reason for that: Verizon usually takes higher depreciation allowances than AT&T, so their earnings look a little bit lower.
Technology: If you are an investor interested in capital growth, and want to see your portfolio grow at an above-average rate, here are four tech leaders that you’ll want to buy: IBM Microsoft, Nokia and Oracle. These are all companies that are trading at much, much lower price/earnings ratios than they had during even the normal times in the 1990s and far below what they were back in the…in the bubble era, and I think they will treat you well if you’ve got a time horizon of, say, 12 to 18 months or even longer, and I would commend them to you for capital growth.
With a bit of luck, stocks could be tracing out the early stages in a sustainable uptrend by the election, which is why now you should take advantage of bargain stock prices. The best stock market tip I can give investors is to do some serious buying before it’s too late!
For more than two decades my time-tested investing approach has helped my Profitable Investing subscribers become 10 times richer in markets much more volatile than this one. If you’re looking for a sensible and safe way to invest on Wall Street, then tune into “Profiting from the Market Meltdown” where my colleague, Jon Markman, editor of Trader’s Advantage and I help steer investors out of this stock market quagmire! And best of all? It’s absolutely free! Don’t miss out!