As the stock markets were going through their second meltdown of the week on Wednesday, I received a phone call from a Canadian Press reporter. What, he asked, would I suggest that investors do now?
I know that Wednesday seems like a century ago in the light of what has happened since, but flash back for a moment to that day. The TSX had just plunged another 349 points to bring its loss for September to almost 1,900 points (13.75%). The Dow had fared even worse, dropping 450 points on the day. Stocks were sinking faster than a ship with a holed hull and people were selling everything in a rush to the lifeboats.
My response to the CP writer was to tell his readers to stop panicking and take a deep breath. The stock markets weren't going to zero. Quality companies like Enbridge, TransCanada, Rogers, Shaw, and Fortis, just to name a few, were not going to implode. Enbridge will still be delivering natural gas to your home 20 years from now. Rogers will still be supplying cable TV services to folks in eastern Canada and being paid very handsomely for it and Shaw will be doing the same in Alberta. Fortis will still be generating electricity and TransCanada will be carrying oil and gas through its pipelines.
Yes, Canadian banks and insurers have been sideswiped by events in the U.S. but there is no comparison between their situation and that of Lehman Brothers, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, and all the other fallen American icons. Royal, TD, Scotiabank and the others will still be around decades from now, unless the federal government some day decides to let them merge.
However, I did tell the CP reporter that people shouldn't put their heads in the sand and do nothing. Painful as it may be, investors need to take a long, hard look at their portfolios. We can't change the past but we can try to minimize the damage going forward.
I pointed out to him that history tells us that big stock market losses are always followed by a rebound, often a dramatic one. I said I expected it would happen again this time, and reasonably soon. His story hadn't even made it onto the wire before my prediction became obsolete!
First, the U.S. government did an about-face and announced that it would save AIG from bankruptcy at a cost of up to $85 billion. That was followed by news of a number of extraordinary measures to end the liquidity crisis and restore stability to the stock markets. Central banks around the world poured $180 billion into the financial system. The SEC banned short-selling of financial stocks. Administration officials sat down with Congressional leaders to hammer out a comprehensive plan that would effectively see the government buy up all the messy bad debts, thus enabling the banking system to get back to business as usual.
Back in the old days, investors would have thrown their hats in the air in celebration. Since hardly anyone wears hats these days except in the dead of winter, they contented themselves with going out and buying stocks.
And did they buy! The TSX shot up 187 points on Thursday and then added a mind-boggling 848 points on Friday, the biggest one-day gain in its history. In just two days, we recovered more than half of the month's losses.
Can it go on? I doubt it, certainly not at anything like this pace. In fact, this could turn out to be what's known as a sucker's rally. Yes, it appears that the dramatic action of the U.S. government may have finally eased the credit crunch that has plagued the markets for more than a year. But there are still many underlying problems, not just in the States but around the globe. Russia is spending billions to try to revive its sagging fortunes. The boom in China is finally slowing down. Oil moved back over US$100 a barrel on Friday but commodity prices are still well off their highs of earlier in the year. The Washington bail-out, which will cost hundreds of billions when all is said and done, is likely to put downward pressure on the U.S. dollar. That could revive inflation fears and eventually lead to higher interest rates. We're not out of the woods yet.
So I suggest using this huge rally as an opportunity to revamp your portfolio, if you decide some action is needed. Sell some stocks or funds you were wishing you had disposed of when the markets were crumbling and build cash reserves.
Of course, if upon review you decide that your portfolio is well diversified with a good mix of bonds, cash, and high-quality stocks or equity funds, then you should take no action. You've done your homework and put a plan into place so stick with it. Over time, you'll do fine.
However, if you determine that in fact your portfolio is flawed and is exposing you to more risk than you are comfortable with, you need to create an action plan. Decide which securities you want to get rid of and take advantage of this market bounce.
As for commodities, I don't advise aggressively adding to positions at this stage. I want to see where oil will settle and whether last week's unprecedented spike in bullion was a flash-in-the-pan, as the Friday pull-back suggests. One exception among the commodity stocks is Viterra (TSX: VT) which I recommended last week as a buy under $11. It closed at $10.50 on Friday so I suggest you start to build a position. – G.P.
I know that Wednesday seems like a century ago in the light of what has happened since, but flash back for a moment to that day. The TSX had just plunged another 349 points to bring its loss for September to almost 1,900 points (13.75%). The Dow had fared even worse, dropping 450 points on the day. Stocks were sinking faster than a ship with a holed hull and people were selling everything in a rush to the lifeboats.
My response to the CP writer was to tell his readers to stop panicking and take a deep breath. The stock markets weren't going to zero. Quality companies like Enbridge, TransCanada, Rogers, Shaw, and Fortis, just to name a few, were not going to implode. Enbridge will still be delivering natural gas to your home 20 years from now. Rogers will still be supplying cable TV services to folks in eastern Canada and being paid very handsomely for it and Shaw will be doing the same in Alberta. Fortis will still be generating electricity and TransCanada will be carrying oil and gas through its pipelines.
Yes, Canadian banks and insurers have been sideswiped by events in the U.S. but there is no comparison between their situation and that of Lehman Brothers, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, and all the other fallen American icons. Royal, TD, Scotiabank and the others will still be around decades from now, unless the federal government some day decides to let them merge.
However, I did tell the CP reporter that people shouldn't put their heads in the sand and do nothing. Painful as it may be, investors need to take a long, hard look at their portfolios. We can't change the past but we can try to minimize the damage going forward.
I pointed out to him that history tells us that big stock market losses are always followed by a rebound, often a dramatic one. I said I expected it would happen again this time, and reasonably soon. His story hadn't even made it onto the wire before my prediction became obsolete!
First, the U.S. government did an about-face and announced that it would save AIG from bankruptcy at a cost of up to $85 billion. That was followed by news of a number of extraordinary measures to end the liquidity crisis and restore stability to the stock markets. Central banks around the world poured $180 billion into the financial system. The SEC banned short-selling of financial stocks. Administration officials sat down with Congressional leaders to hammer out a comprehensive plan that would effectively see the government buy up all the messy bad debts, thus enabling the banking system to get back to business as usual.
Back in the old days, investors would have thrown their hats in the air in celebration. Since hardly anyone wears hats these days except in the dead of winter, they contented themselves with going out and buying stocks.
And did they buy! The TSX shot up 187 points on Thursday and then added a mind-boggling 848 points on Friday, the biggest one-day gain in its history. In just two days, we recovered more than half of the month's losses.
Can it go on? I doubt it, certainly not at anything like this pace. In fact, this could turn out to be what's known as a sucker's rally. Yes, it appears that the dramatic action of the U.S. government may have finally eased the credit crunch that has plagued the markets for more than a year. But there are still many underlying problems, not just in the States but around the globe. Russia is spending billions to try to revive its sagging fortunes. The boom in China is finally slowing down. Oil moved back over US$100 a barrel on Friday but commodity prices are still well off their highs of earlier in the year. The Washington bail-out, which will cost hundreds of billions when all is said and done, is likely to put downward pressure on the U.S. dollar. That could revive inflation fears and eventually lead to higher interest rates. We're not out of the woods yet.
So I suggest using this huge rally as an opportunity to revamp your portfolio, if you decide some action is needed. Sell some stocks or funds you were wishing you had disposed of when the markets were crumbling and build cash reserves.
Of course, if upon review you decide that your portfolio is well diversified with a good mix of bonds, cash, and high-quality stocks or equity funds, then you should take no action. You've done your homework and put a plan into place so stick with it. Over time, you'll do fine.
However, if you determine that in fact your portfolio is flawed and is exposing you to more risk than you are comfortable with, you need to create an action plan. Decide which securities you want to get rid of and take advantage of this market bounce.
As for commodities, I don't advise aggressively adding to positions at this stage. I want to see where oil will settle and whether last week's unprecedented spike in bullion was a flash-in-the-pan, as the Friday pull-back suggests. One exception among the commodity stocks is Viterra (TSX: VT) which I recommended last week as a buy under $11. It closed at $10.50 on Friday so I suggest you start to build a position. – G.P.
