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The Latest Stock Market Plunge: August 2015 down 10%

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Did the stock market plunge again? Are your positions wiped out or are you relishing the opportunity to find new entry points?

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The 200 DMA crosses the 50 DMA: is that the death cross on 8/11? Updated

When I was a student in college many moons ago, I remember on Sunday outside chapel, and on selected weekdays, a seemingly old lady would parade up and down the street, offering pamphlets, protesting and trying to gain exposure for her world view that encompassed the imminent ending of the world…

A Brief Moment in 1987

And for one brief moment in 1987, the stock market plunge of October wiped out billions of dollars in a couple of sessions.

Just recently, if you’d been reading recent headlines on the Street, like this one, you’d be tempted to believe the same stock market plunge had just taken place again!

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But is it? Is the end nigh? Or shall we all live again to trade and make money? Well, if you haven’t already guessed, I tend to the latter point of view. We will always prevail, perhaps a little wiser, certainly a lot poorer.

But we will all be investing again one day in the not too distant future, once we’ve licked our wounds after the current stock market plunge. At that moment, it might be hard to imagine as you and I are likely sitting on huge losses on our portfolios (I was down over 50% in 2008!)

Long way to go up – or down?

We should never use the past to judge the future, but previous statistics can be informative. The two most serious downturns in the 20th century were quite severe. The second crisis was in 1970’s when the Dow Jones dropped and the stock market plunge wiped out nearly 50% of the market value but what is worth noting: the greatest point loss (by points) was in fact only #17 in the total percentage losses.

In 2008 we were approaching a 45% downturn, and things have recovered well since then in the markets. There were only a few buyers out in the markets at the time, but many sellers so sell-orders swamped buy orders as companies, institutions, and individuals tried to unwind their risky positions, and save their skin. An awful lot of ‘unwinding’ was done before a more orderly market returned and there was more of a balance between buyers and sellers.

800px-DJIA historical graph

But in each of the downturns that occurred, people got back to business (eventually) and those downturn periods can hardly be seen in the chart above. But with markets still prone and intervention seeming not to work, we just have to figure out how to get from here and now to then.

Are we at the bottom, in the middle or at the top?

Many pundits are suggesting that the bottom of the market is not yet near, but that it is coming. While no one is sure of the exact time frame, several writers talk extensively about ‘capitulation’ – the notion that the selling is exhausted, and buyers’ orders match sellers’.

Jeff Cox of CNBC, writes “…But while hedge funds and industrial investors have been bailed out of positions, individual retail investors have still not reached the severe panic point.”

It’s quite likely most of us willl be steamrollered by the market as we jostle our buy/sell orders. I know I have: I now know the meaning of trying to catch a falling knife! He goes onto say that heavy volume will indicate that the capitulation phase has started, unfortunately we’re just not seeing that yet.

Cramer’s opinion always tells you what he thinks, EXACTLY. But you should take those opinions with a large pinch of salt!

So what is an successful trader/investor to do?

This is what I’m doing these days as I try to make sense of what’s going on, how I’m being affected by the latest stock market plunge, and where I’ll be in 12 months time:…

1. Keep eyes on your cash! It’s YOUR CASH!

Really, it’s just survival out there, that’s the name of the game now. Making sure that your cash is as safe as you can – verify that you have cash in the bank, that your bank deposits are sufficiently insured or guaranteed.

I’m planning to separate my funds into two bank accounts in separate institutions. While my own government authority has guaranteed deposits until 2010, having no access to these funds even temporarily could cause some cashflow problems, so I’d rather not take the chance.

2. Be better informed! Read, read, read…

I’m sure this is one that should affect us all! Here we are fretting about problems and issues that we all know little about: WTF is a Credit Default Swap? Well, since people are taking such risks with their money (and ours!), it seems that we have to all become better informed about the systemic risks these people are taking without so much as consulting us. I, for one, will endeavor to be much better informed about these matters.

3. Pie in the sky: that’s all it can ever be!

Skepticism has always been one of my strong suits, but now I’m becoming skeptical of the truisms, investing group-think wisdom, and aphorisms passed from advisor to client all over the world. I just don’t see why we should all be told that we have to invest in the stock market, expect 9% returns, and take SO MUCH risk without any chance of reward. No businessperson worth their salt would invest in a business like that.

Yet that is what most ‘retail investors’ face everyday. Yet every day, that investor is told to live with the risk of a stock market plunge wiping out not just some of the portfolio, but a lot of it! There will always be the risk of a stock market plunge! …

I’ll be adding to this discussion shortly, but I wonder: how were you affected by the crash? What are you doing to protect your investments? How do you see things now in view of the possible double dip that a lot of people are talking about?

Credit Cards, Friends and PayDay Loans: Which would you use if you were short of cash?

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There are indeed many ways that we simply throw good money away. In my previous post, I outlined seven ways that I have successfully thrown money away over the years. These are the ones I remember! I’m sure there are dozens more that I could think of. There are of course some ways that you can avoid events spiralling out of control, but each of them needs some self-control in that they all have inherent benefits, costs, and risks. But for short term personal loans needed urgently, there aren’t so many options. Credit Card #1

The Credit Card: This is perhaps the easiest way to borrow money, it’s available and easy to access. Just stick your card in the ATM, enter your password, retrieve. Then wait for the bill at the end of the month. The costs though are in the interest rates charged from the date of the loan, ATM fees and perhaps a worse credit score. Worse: this may not be an option if you are nearing your credit limit. The last thing you want do is incur late payment penalties on your Credit Card or overage penalties when you break your limit. In fact, having a safety limit for errors in billing is a good idea. Don’t run your credit card at 100% of your limit! friend next door

The Friend at Work or Next Door: Again an easy option, and one which will rarely attract interest payments as friends are ‘helping each other’. Typically, you’ll hear people saying things like “I had an unexpected emergency. Can you lend me a few hundred dollars until payday?” Most friends will oblige for a ‘friend in need’… and that’s where the problems begin. You can’t pay it back on payday, then you begin to feel embarrassed to see your friend. Every time you see him or her, you feel guilty thinking “I have to pay you back, but I can’t”. Others report that lending money to a friend or borrowing from a friend impacts the relationship. Things never seem quite the same, because money entered the equation. I stopped lending to friends after the problems it caused.

payday The PayDay Loan: A more recent entrant to the informal loan are the payday loans – a short term loan that is designed to bridge or cover the cashflow problems. With this facility now provided on the Internet, the application procedure could be quite quick and easy. Often these companies will provide next business day payment electronically. The payments are due (depending on the conditions of the loan) on the next pay day. The catch: it isn’t free. It’s not necessarily cheap either with fees that can run quite high. Most importantly, though, they are designed as short-term loans to cover short term problems. The fees and interest rates can be expensive, if these products are treated incorrectly. In some cases, though, clients become dependent on these kinds of loans; and can rack up large debts because they fail to read the fineprint or stick to their end of the bargain (the APR rates would make your eyes pop if you were borrowing for 12 months).

Personal Emergency Fund Each of these three methods allows you to get a small amount of cash to cover a cashflow crisis. Each of them has obvious benefits, costs and negative factors. Whichever you decide to use, there’s no doubt that setting aside a little money for your own personal ’emergency fund’ is probably the sanest, cheapest and most effective solution in the longer term. But that won’t help much if your bank account is flashing $0.01 right now. What do you do when you need to borrow some cash fast? Where do you go? What are your good or bad experiences? Do let me know!

Double Dip Recession: Is this where we’re headed in 2010/11?

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Are we at risk of a double dip recession? Certainly many investors, economists, and pundits think so.

You may have noted that the Australian Reserve Bank has raised interest rates, and other countries are following suit. Unfortunately for many borrowers in the weaker economies of the Western world, jobs are being cut, and salaries are stagnating as companies and governments fight their own battles with shrinking revenues.

What is a double dip recession?

In short, a double dip recession occurs when the gross domestic product (GDP) growth starts to shrink after a quarter or two of positive growth. This positive growth period itself occurs after a recession.

In other words, the sequence of events is: a recession that precedes a recovery; after a truncated period in the recovery, perhaps only one or two quarters, a recessionary period returns as growth in GDP shrinks again.

Consumers Bite Back

So what do borrowers do facing such double dip uncertainty? They rein in spending, cut expenses and start saving like mad. And we can all clearly see the effects of this, as retail expenditure falls off a cliff, bank balances rise and expensive services get cut, like premium services on cable, mobile phone, etc..

Unemployment in the US is hovering around 10% so job security is a primary concern for many working people. Those with jobs would rather save more money now than spend, spend, borrow and spend, so the employed are increasingly boosting their savings rate to multi-year highs. With unemployment likely to remain high for the foreseeable future, this bodes well for savings rates and workers’ bank accounts and it coincides with a period of lower interest rates.

Banks: Protecting their interests

The banks have acted in their own best guardians in many situations by raising rates on unsecured loan items such as credit cards, personal loans, etc. as they are facing an onslaught of credit defaults and increasingly interventionist laws from governments worldwide that seek to curtail their excessive profiteering.

The latest round of BASEL III talks has threatened to increase capital requirements further, thereby making banks less vulnerable but in short-medium term dampening lending prospects even further.

However, many consumers are experiencing surging credit card rates to as high as 30% pa for their debts, increased levels of minimum payments, and restricted credit lines, or even credit card terminations.

The consequence of this for the economy in the short term is only bad: higher default rates on loans, less leveraged spending on consumer items, less reinvestment by companies, and tightened budgets in both governments and corporations. And banks on the one hand are stashing the extra cash to bolster their banking reserves rather than lend, and on the other cite reduced demand for loan products and services. But governments keep calling for more lending, yet banks only lend to those who don’t need it. Ironic, but true. After all none of this really lessens the risks of a double dip recession by any means.

It’s The Economics That Matter

Why? The inflationary subsidies, tax breaks and bailouts have all served to add stimulus to the economy, preventing the situation getting far worse. Recently, for example, in Taiwan, the economic indicators started flashing green again, after extensive periods of both overheating (until 2007) and recession (2007-2009). So in many markets, there are initial signs of recovery as some exporting economies move out of recession and bond rates are indicating upward pressure, too. But…

Where now, consumers?

Many economists are predicting a double-dip recession in 2010. This may happen, and things may worsen again in the short term as the stimulus measures are withdrawn, run out of funds (new car credits) or expire their terms. Even if that doesn’t happen, I don’t think consumers are going to start spending any time soon. They are scared of the future, and the prospect of a double-dip may only force consumers to redouble their efforts at controlling their spending.

In short, going into the latter part of 2010, there is still a lack of confidence in the recovery; and recent upturns in the stock market are likely to be short-lived. I do not think we will retest bargain basement pricing as in early 2009, but for those with patience, guts, and cash, there will be good opportunities to purchase both stocks and real estate in the coming 12 months.

What’s an investor to do?

With the risk of a double dip recession, typical in a bear market scenario like this, investors are unlikely to be buying for the long haul. They would prefer to ‘trade the markets’ in either direction, buying or shorting stocks when there’s opportunity otherwise staying in cash.

How would you plan to trade these recessionary times? Let me know, via the contact form! Look forward to hearing from you.