March 2, 2009--Congratulations taxpayers. You now own shares in Citigroup (C). And before the Ides of March, you could also have an interest in other financial firms as well.
If I wrote this a year ago, I would have been called crazy, if not worse. The great editors at SFO Magazine certainly would have thought twice about asking me to write again.
Six months ago, if I predicted that fourth-quarter GDP would decline 6.2 percent, I would have been cast off as being overly pessimistic.
Yet, the mere fact that both events have occurred is an indication of the speed at which the financial sector and the economy have deteriorated. It took just a few months for the economy to go from decent expansion to nasty contraction.
Unemployment averaged 5.15 percent during the first-half of 2008. Since then, things have gone downhill. It took the employment rate just nine months to rise from 5 percent (April) to 7.2 percent (December). February’s unemployment rate could top 8 percent. (Economists are currently forecasting 7.9 percent).
Copper has plunged by more than 50 percent since September. Oil is struggling to stay above $40 per barrel after reaching $147 last July.
Earnings are a mess. Through Thursday evening, 474 S&P 500 companies have reported. The median change in per share earnings is -7.7 percent, versus +12.3 percent a year ago. More significantly, nearly 60 percent of companies experienced a year-over-year decline in profitability. Last year, just 27 percent of firms experienced lower profits.
The sheer speed at which circumstances have deteriorated has caught many CEOs off guard. It also has forced many brokerage analysts to constantly revise their estimates.
At the same time, seemingly “conservative” stocks are failing to provide portfolios much defense.
For example, in last month’s commentary, I noted how we recently added Centerpoint Energy (CNP) to one of our portfolios. CNP makes the majority of its revenues from operating an electric utility, and it pays a dividend. Last week, the stock dropped notably after the company provided disappointing guidance. Needless to say, we sold the stock.
STRATEGIES FOR THIS MARKET
Given the vast amount of uncertainty and the potential for stocks to go lower (I continue to have a target of 6,300 for the Dow Jones Industrial Average), investors need to keep one hand over the sell button. The most fundamental rule in investing is to sell when the reason you bought a security no longer applies. And for many companies, conditions have changed.
I understand that many of you don’t want to take a loss. I have received e-mails asking why I’m selling stocks within our Zacks Elite Focus List portfolio after holding them only a month or two. (Our target hold time for this portfolio is a minimum of nine to 12 months.) But it is better to take a known loss than to risk a potentially larger loss in the future.
Similarly, the rules for buying have changed, especially for those of you unnerved by the current market conditions. Consider buying fewer shares, dollar cost averaging or using buy stops.
For example, if you normally invest $5,000 per stock trade, invest $1,250 or $2,500 instead. Alternatively, buy shares in $1,250 increments over a period of four months or four quarters (“dollar cost averaging”). You can also set an upper price for where you would buy the stock—say $25 for a stock currently trading at $20.
With all of these strategies, you will give up some potential upside, but you will also reduce your downside risk.
What you should not do is try to time the market, other than for a very short-term trade. If you think you will be able to get back in the market in time to catch the big rebound, you are fooling yourself. There will not be any forewarning that the true rebound is about to begin, and you will miss out significant gains.
Therefore, the key is to become more conservative, while maintaining some exposure to stocks. There are still good stocks available; they are just harder to find. If you have patience, seek out fundamentally sound companies trading at attractive valuations and are willing to sell without a second thought, you will do fine.
We are in a recession, and stocks are going to fall further. So, just focus on controlling what you can control, which means making changes to your portfolio as necessary. Remember, in a crisis situation, action is usually better than no action.