Archive for the ‘Investing’ Category
Despite an initially positive reaction by the stock market to CPI data yesterday, the market headed into negative territory after a heavy dose of bad news from the Fed and Bear Stearns (NYSE: BSC).
Take One for the Team
The Federal Reserve announced it would work with JP Morgan Chase (NYSE: JPM) to float a cash-strapped Bear Stearns funds in order to keep the company in business. Their concern is that, given an already air-tight credit market, the entire economy would collapse if Bear were to suddenly go out of business. Why? Because nobody really knows how enmeshed Wall Street is when it comes to lending between firms. If one giant falls, several more may unexpectedly collapse as well. Even though it has been given a brief reprieve, most expect that the company will be sold to a larger bank or private-equity firm within a matter of weeks. After the news, BSC stock quickly lost about half of its value…ouch.
Enter the 2nd Bear
Or, I guess I should say the market has already entered the second bear market of the millennium (irrespective of how the Bear Stearns issue pans out) . Now the question is, will it be long or short? In my opinion, you have to hope for the best and expect the worst right now. Especially because I fear a larger problem with consumer credit (i.e., credit cards) could sneak up on the economy if we’re not careful.
The US Bureau of Labor Statistics announced this morning that nonfarm payrolls fell by 63,000 in February, leaving unemployment at approximately 4.8%. This comes on the heels of a loss of 22,000 jobs in January, making it two straight months of job decreases.
As Steve Liesman noted on CNBC this morning, we’ve never had two straight months of decreases in a row outside of a recession.
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The US Commerce Department announced today that durable goods (items which last 3 or more years) fell about 5.3% in January. These products (which include items such as appliances, expensive electronics, and home furnishings) are typically the first to feel the pinch in a recession.
Not good news for the stock market- especially given the gathering storm cloud of price inflation and credit liquidity problems which continue to plague the economy.
Tags: , Economic Indicators
Since it’s Friday, I thought I’d take a break from the normal stock market news and talk about investing in a different market: Real Estate. So, not much has changed: the economy looks like we’re headed for a recession, credit markets remain tight, and inflation is gradually emerging as a dark cloud on the horizon. However, sometimes opportunity may exist in even the bleakest of markets - even real estate.
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Tags: Investing
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It seems like investors are inundated on a daily basis with short term market headlines (especially now). This information, while useful and important, can be overwhelming and distracts from the most critical aspect investors should focus on: long term investing. The fact is, trying to time the market in the near term is an extremely difficult undertaking - one that many money managers fail miserably at. Still, many investors try their hand at market timing and ultimately lose money.
Small Cap Stock Investing as a Long Term Play
As an alternative, investors should focus on the long term while taking into account their risk profile. Investing in a diversified portfolio of small cap stocks can yield above average returns over the long term. Long term means 5-10 years, period (don’t kid yourself - be realistic about your capital requirements). However, I do not recommend that investors close to retirement or with near term financial responsibility (debt, children, college, etc.) maintain a large position in these types of stocks.
Don’t Be Myopic
In 2007, large cap stocks outperformed mid-cap and small cap stocks (this trend will likely continue). However, the good thing is that short term focused investors will neglect out of favor small and mid-cap stocks as a result. This could present a buying opportunity for long term focused investors.
The Value Proposition
Bottom line: small caps as measured by the Russell 2000 have outperformed large caps (Russell 3000) over the long term (see graph). There are several reasons for this. For example, small cap stocks typically experience higher variability in near term returns - this “risk” is essentially the trade off (remember, there is no free lunch on Wall Street). However, if we are focused 5 to 10 years in the future, we shouldn’t care what the 1 year or 3 year return is. Further, small caps offer a unique opportunity since they have the most room to grow. Think about it, even large growth plays such as Apple (NASDAQ: AAPL) were once small cap stocks.
Don’t Forget
The fundamentals of investing still apply: you must be diversified. Investing in a small number of stocks (of whatever size) is assuming a level of risk that I am not comfortable with. If one stock heads for bankruptcy you could easily lose most of your portfolio (and never get it back). That’s right, never. So, stay diversified, monitor the fundamentals, and stay focused on the long view.
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