Sometimes it seems there’s just no light at the end of the tunnel. Even those of us who try to look at the bright side of things are getting worn down a bit. On the surface, it seems like there is nothing good coming around the corner.
Housing prices continue to drop. Commercial real estate prices are catching up fast. State budgets are facing deep deficits and a couple of them (Michigan for sure) are headed for bankruptcy. Retailers are cannibalizing each other by slashing prices just to get any sales at all (ain’t capitalism grand – if you’re prepared?).
To top it all off, the next round of unemployment data is just days away. When you consider almost two million jobs have been lost so far in 2008 and about 60% of those in just the past three months. Unemployment is accelerating and December’s job report could be the worst yet. It’ll be almost impossible for a sustainable economic recovery to occur without consumers feeling confident they’ll still have a job in six months.
The report might be bad, it may be horrible. Either way, the report will force the markets to do a reality check. And reality is the last thing bulls want the markets to focus on.
Despite it all, you should be getting excited about 2009.
You see, the markets have made a complete 180 degree turn in the past few months. “Safe” assets like U.S. treasury bonds are sitting at multi-decade highs. Safe stocks are fetching a premium. For instance, Wal-Mart (NYSE:WMT) has been one of the best performing stocks of the year.
Safe is in and risk is out. That means safe things are expensive – too expensive in many cases, and risk is cheap. For instance, as we looked at the other day, convertible bonds are as cheap as they have been in nearly three decades.
Convertibles are risky because they are only issued by companies who are truly desperate for cash. They have to offer investors the security of a bond and all the upside of a stock just to get the capital they need.
On top of that, high-grade municipal bonds, issued by states and local municipalities, are yielding 5% or 6%. Yields this high would have been unthinkable just a few years ago.
Here’s the thing though, since risk is so cheap, the amount of risk has actually been reduced. Meanwhile, the upside potential has increased exponentially.
The perfect example is in the riskiest of all assets, the TSX Venture Exchange. The Venture Exchange is home to all of the penny mining stocks and other venture stage companies which are the most speculative investments (a.k.a. the most likely to fail miserably) you can make. It’s one of the few places you can earn quadruple-digit returns if you’re holding the right lottery ticket…err…shares of the right company.
Investors were looking for big returns and had a huge appetite for risk. And they gobbled up the risky stocks the Venture Exchange offered. The TSX Venture Index started the year around 2,700.
The flight to safety has absolutely destroyed this market. In July the index dropped to around 2,500. After the liquidity crunch rocked the markets in the fall, the index fell 700 marking a 74% drop for the entire index.
It’s even worse if you look at individual stocks. Dozens of the penny stocks which fetched $2 or $3 a piece a year or two ago now are now trading for between 10 or 15 cents each.
It has been an absolute slaughter for anything risky and investors are more risk averse than ever. But now is not the time shy away from risk, it’s the time to take it on.
Consider the penny stock which has fallen from $2 to 10 cents. When it was $2 a share, investors couldn’t get enough of it. The prospect of the stock going to $3 or $4 over the next year was too enticing. A 50% or 100% return had investors clamoring for the risk.
Now that has all changed and has created a remarkable opportunity. Since no one is willing to take on the risk, the risk is actually reduced. Let me explain.
Consider the average investor who was willing to put up $2,000 to buy 1,000 shares of the penny stock. They didn’t want to risk too much, but wanted to have enough “skin in the game” to make it worthwhile. In this case, if he could double his money, he’d walk away with $4,000.
Now the game has changed. With panic setting in, bad news hitting the markets every day, and an economy “that is going to get worse before it gets better,” he’s not going to put money in anything that risky. Of course, he could buy the same 1,000 shares now for about $100.
The odds are generally the same of the speculation paying off, but he’s unwilling to make it. Even though he’s only risking $100 to try and make a $3,900 profit instead of risking $2,000 to make a $2,000 profit.
It’s totally counterintuitive, but 2009 will be the year to take risks. When the whole world is risk averse, the potential rewards for taking on risk are absolutely tremendous. When I say, the seeds of wealth and financial freedom are planted in bear markets; this is what I’m talking about.
Here at the Prosperity Dispatch, we’ll probably keep the same mantra for next year: this may be the buying opportunity of a lifetime, but we’ve got to keep enough cash on hand for the buying opportunity of 5 lifetimes which could always be just a few days away.
There’s no guarantee the U.S. and world market s are headed for a full-blown panic, but the possibility is very real. If that happens, then it will be time to go all in. Until then, start looking for good risks. “Safe” investments are no longer safe and “risky” investments are safer than ever.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
December 30, 2008
Housing prices continue to drop. Commercial real estate prices are catching up fast. State budgets are facing deep deficits and a couple of them (Michigan for sure) are headed for bankruptcy. Retailers are cannibalizing each other by slashing prices just to get any sales at all (ain’t capitalism grand – if you’re prepared?).
To top it all off, the next round of unemployment data is just days away. When you consider almost two million jobs have been lost so far in 2008 and about 60% of those in just the past three months. Unemployment is accelerating and December’s job report could be the worst yet. It’ll be almost impossible for a sustainable economic recovery to occur without consumers feeling confident they’ll still have a job in six months.
The report might be bad, it may be horrible. Either way, the report will force the markets to do a reality check. And reality is the last thing bulls want the markets to focus on.
Despite it all, you should be getting excited about 2009.
You see, the markets have made a complete 180 degree turn in the past few months. “Safe” assets like U.S. treasury bonds are sitting at multi-decade highs. Safe stocks are fetching a premium. For instance, Wal-Mart (NYSE:WMT) has been one of the best performing stocks of the year.
Safe is in and risk is out. That means safe things are expensive – too expensive in many cases, and risk is cheap. For instance, as we looked at the other day, convertible bonds are as cheap as they have been in nearly three decades.
Convertibles are risky because they are only issued by companies who are truly desperate for cash. They have to offer investors the security of a bond and all the upside of a stock just to get the capital they need.
On top of that, high-grade municipal bonds, issued by states and local municipalities, are yielding 5% or 6%. Yields this high would have been unthinkable just a few years ago.
Here’s the thing though, since risk is so cheap, the amount of risk has actually been reduced. Meanwhile, the upside potential has increased exponentially.
The perfect example is in the riskiest of all assets, the TSX Venture Exchange. The Venture Exchange is home to all of the penny mining stocks and other venture stage companies which are the most speculative investments (a.k.a. the most likely to fail miserably) you can make. It’s one of the few places you can earn quadruple-digit returns if you’re holding the right lottery ticket…err…shares of the right company.
Investors were looking for big returns and had a huge appetite for risk. And they gobbled up the risky stocks the Venture Exchange offered. The TSX Venture Index started the year around 2,700.
The flight to safety has absolutely destroyed this market. In July the index dropped to around 2,500. After the liquidity crunch rocked the markets in the fall, the index fell 700 marking a 74% drop for the entire index.
It’s even worse if you look at individual stocks. Dozens of the penny stocks which fetched $2 or $3 a piece a year or two ago now are now trading for between 10 or 15 cents each.
It has been an absolute slaughter for anything risky and investors are more risk averse than ever. But now is not the time shy away from risk, it’s the time to take it on.
Consider the penny stock which has fallen from $2 to 10 cents. When it was $2 a share, investors couldn’t get enough of it. The prospect of the stock going to $3 or $4 over the next year was too enticing. A 50% or 100% return had investors clamoring for the risk.
Now that has all changed and has created a remarkable opportunity. Since no one is willing to take on the risk, the risk is actually reduced. Let me explain.
Consider the average investor who was willing to put up $2,000 to buy 1,000 shares of the penny stock. They didn’t want to risk too much, but wanted to have enough “skin in the game” to make it worthwhile. In this case, if he could double his money, he’d walk away with $4,000.
Now the game has changed. With panic setting in, bad news hitting the markets every day, and an economy “that is going to get worse before it gets better,” he’s not going to put money in anything that risky. Of course, he could buy the same 1,000 shares now for about $100.
The odds are generally the same of the speculation paying off, but he’s unwilling to make it. Even though he’s only risking $100 to try and make a $3,900 profit instead of risking $2,000 to make a $2,000 profit.
It’s totally counterintuitive, but 2009 will be the year to take risks. When the whole world is risk averse, the potential rewards for taking on risk are absolutely tremendous. When I say, the seeds of wealth and financial freedom are planted in bear markets; this is what I’m talking about.
Here at the Prosperity Dispatch, we’ll probably keep the same mantra for next year: this may be the buying opportunity of a lifetime, but we’ve got to keep enough cash on hand for the buying opportunity of 5 lifetimes which could always be just a few days away.
There’s no guarantee the U.S. and world market s are headed for a full-blown panic, but the possibility is very real. If that happens, then it will be time to go all in. Until then, start looking for good risks. “Safe” investments are no longer safe and “risky” investments are safer than ever.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
December 30, 2008
