by Jack Lee
Chrysler has just issued an order to lay off 25% of its work force. 25% is a big number and that number was not based on what Chrysler is doing today, it is based on what Chrysler will be doing 6 months from now. Same advanced thinking goes on in the stock market and it’s important for you to under the market/economy so you can protect yourself and make wise financial decisions to minimize your risk during these down times.
Here’s just a few tips for starters, don’t use plastic to make your purchases right now, use your ATM if you must use plastic. If you have never saved a nickel in your life, there is no better time to start! You do that by paying yourself first out of every paycheck. Before anything gets spent, take out 10% and pay yourself and put it in a savings account! Already having trouble, need help with your current debt load? Go see a financial counselor, there are free counselors available too and it is possible to lower or at least consolidate your debt into something more manageable. Shop smart, make your money go further and this is whole chapter in itself. Let me sum it up like this, learn the difference between wants and needs. Financial education is your most powerful tool in bad times and this article is designed to do help you understand the times. our economy and what may lay ahead. I hope you will read it carefully, because there are a few pearls within that you really need to understand.
I believe that much of the drop in the stock prices has been adjusted to compensate for what lies ahead in this recession. By the time the “expected bad news” has hit, the stock price will be in the process of being adjusted more months ahead for the next round, and it could be on an up swing. So, if you have stocks that have been beaten up, remember much of that future loss is already factored in, heck, you might as well ride it out now. Better yet, do yourself a favor and consult a professional adviser who has no vested interest in the stock. See what he or she says about it?
For some really astute investors this horrible time presents a rare buying opportunity, but you better time it right because this is one tricky market!
Timing is the key to many things in life, and in the stock market it’s absolutely fundamental to a happy outcome! If you are buying just a little early you may suffer enough pain that it will cause you to dump your “good stock” that is sure to rebound at the first sign of a real recovery. Dont be swayed by emotion, even though its hard not to be when you see your 401K shrinking!
This why you must understand the psychology of the market. Its the psychology of the market is responsible for the wild swings. REASON: The pain that comes from a loss is far more pronounced than the happiness from a profit…this is why downturns are much more radical (usually dumps more points) than those up ticks! It’s also why we see headlines that are more likely to be pointing out something negative than positive. Negative news has more impact on us – it’s just the way our brains are wired. Everyone gets caught up in the bad news, even the people that report the news!
But, good investors dont get swayed by emotion, they deal in fact.
We should focus on the facts and we should learn from history! For instance in 1932, over 10,000 banks, 40% of those that existed in 1929, had failed! The GNP had fallen over 30% since 1929 and unemployment had risen to a staggering levels. Prior to Roosevelt’s election, President Hoover had tried to combat the economic free fall through monetary measures (bailouts), then he attempted another approach, taxes!!! He raised the top marginal tax bracket from 25% to 63% and he LOST the next election by a landslide! That was then and here we go again:
TAXES LOOM: The two longest recessions of recent date lasted about 16 months each, one extending from November 1973 to March 1975, and the other from July 1981 to November 1982. In both of these periods there was a noticeable decline in real GDP and this caused government to raise taxes to keep up their big spending habits. Once again the GDP is also dropping off sharply and government needs the revenue, so Wall Street is expecting another rise in taxes.
Government raised taxes in 1932 this delayed the depression recovery by years! The long economic contraction and the painfully slow recovery led many Americans to accept, and even call for, a vastly expanded role for government, though most businesses resented the growing federal control of their activities, i.e. socialism. It was a defining moment for the US back then and we are at another defining moment today, as we enter a new and deep recession. Government is trying to spend its way out and democrats are trying to raise taxes.
Those who fail to learn from history are doomed to repeat it!
Downturns in the market, really severe downturns, rock the world because we are in a global economylosses are more massive than anything weve ever experienced before because of globalization. As this financial article from Fox News recently noted, “Trillions in stock market value gone. Trillions in retirement savings gone. A huge chunk of the money you paid for your house, the money you’re saving for college, the money your boss needs to make payroll gone, gone, gone.
Whether you’re a stock broker or Joe the Plumber, if you have a 401(k), a mutual fund or a college savings plan, tumbling stock markets and sagging home prices mean you’ve lost a whole lot of the money that was right there on your account statements just a few months ago. It works like this, tumbling stocks are like tumbling blocks, one knocks over the next. It starts with the companies that are near ground zero, those most closely related to the cause, which as you must know by now is the housing market implosion, the sub-prime mortgage bundling and the subsequent run on banks. Then the recession ripples move across our big pond and they will eventually touch everything financial.
What’s the next area to be hit hard? Right now, it looks like its Detroit. I opened this article talking about Chrysler’s layoffs, but Ford and GM are just as bad off. Their debt load is so heavy they have all but exhausted (no pun intended) their sources for operating capital. Ford stock has plunged over 85% in recent months and so has GM’s. You could buy GM stock right now for about $5.50. But, is that a bargain? It would seem like a fabulous buy given last years prices. But, GM is struggling through the worst car market in the last 25 years or more.
Dale Jorgenson, an economics professor at Harvard, thinks we are going see huge shrinkages in your 401k in the coming months. So if you think you’ve been tapped hard already, you better prepare yourself for worse to come, that is, if this Harvard economist is right. “If you had it all in financial stocks and they’ve all gone down by 80 percent sorry! That is a permanent loss because those folks aren’t coming back. We’re gonna have a huge shrinkage in the financial sector.” Says, Jorgenson. More reason to be wary of bargain stocks like GM.
Are we Americans really prepared to handle a severe recession? Sure doesnt look that way. Not if you consider the average American has $7000 in credit card debt and almost no savings. We save about 1/5th of what our European neighbors do, but then they went through hard times right up into the mid-60’s, while we were all living it up. Most folks have never experienced really hard times in the US.
But, all the red flags are up now and hard times are coming. Did you know that the massive Public Employees Retirement System in California has already recorded a 27 billion dollar loss because of the stock market decline? If they can be hit this hard, who cant? The simply answer is everyone in the market is at risk right now. The next reporting period should show more billions lost and when the drop in PERS assets exceeds the minimum allowable drop, in other words, if it drops more than 7.5% in a reporting period, the state must cover the loss to bring them above the allowed limit of 7.5%. But, the state itself is technically broke! They need billions more to balance their own budget. Cant turn to the feds, they are having trouble too, theyre almost 11 trillion in the hole and that means there is only one source left to taptaxpayers.
Imagine us 11 trillion in debt! Wow, a trillion is an incredibly hard number to imagine, isn’t it? Let me try to put that number into some sense of scale…1 trillion seconds is 30,000 years. Now consider we owe almost 11 trillion dollars of debt, does that compute? Probably not, but I mentioned the 30,000 number because that’s pretty close to what every man, woman and child in the USA now owes. Actually, it’s a bit more since I wrote that, this goes up a $1 million a minute.
IS THIS RECESSION LIKE THE OTHERS? Many people wonder and thats a fair question, because knowing the answer could help us see our way out of this mess. The answer is a yes and no…hows that for ambiguity? Yes, it has many of the same markings of previous recessions, and no, this recession is different in both scale and cause. Its gone global and that’s bad. It also over banking and home values, and thats real bad. It is reminiscent of the Great Depression and were falling for the same old traps we tried back then that failed.
Chetan Ahya, Managing Director of Morgan Stanley thinks this global recession will take 2 years to muddle through. If he is right then you shouldn’t try grabbing bargain stocks until late 2010! That sure sounds a long ways off doesn’t it? And it could be a rough 2 years, that is, if it is ONLY two years.
This recession is in unchartered territory in many aspects and it’s incredibly complicated thanks to derivities (CDOs) and even for the best economists are having trouble finding out what our risk exposure is to the sub-prime loan market.
MORE WARNING SIGNS: The FDIC has another 117 banks on their “possible failure” watch. As of today the Dow Jones industrial average is down to 8,347 and a year ago it was at 14,000. The Standard & Poor’s 500 index declined to 870 and the NASDAQ composite index is down to 1,536.76, a year ago it was 2750, that’s nearly half its value!
The sentiment indicators which reflects investors trust in the market could not be worse.
We’ve seen wild gyrations in the market because of panic sell offs and this also reflects what we know and what Wall Street really hates, uncertainty about our future.
The presidential election has done little to sooth the markets woes or Wall Street’s fears about the future. What McCain’s or Obama’s economic policies will do is yet to be determined, its an uncertain future and this has kept Wall Street in a state of confusion.
However, we do know Obama’s plan includes taxing the rich. More (wealth shifting) and this is what happened in the second year of the great depression. Didnt work then, wont work now. Like Yogi Berra says, “Looks like de ja vu all over again.”
Financial writer, Cesar Conda writes, “With the stock market in crisis mode and the economy in a pronounced slump, would any economist even the most extreme liberal Keynesian advocate increasing taxes? Of course not. But contrary to economic commonsense, Obama is proposing to do exactly that by raising tax rates on Americas small businesses and investors.”
Stay tuned to Post Scripts, this is a story that is far from over.
NOW FOR MORE TIPS ON HAVE TO SAVE…
Save Money Grocery Shopping
Including tips from Diana, Emily, FrugalWannabe, LJ, Allison, JenMarie, and several more.
Shop for produce at a local farm stand.
Never buy coffee, soda, or other drinks or snacks out.
Always grocery shop with a list.
Take advantage of sales on items that you would normally buy.
Only shop once a month.
Keep a price book and track prices by unit cost.
Stockpile staples when prices are low.
Buy generic items.
Use the Grocery Game.
Plan meals according to what is on sale that week.
Take advantage of rainchecks if the store doesnt have a sale item that you need.
Take advantage of rebates at Walgreens, CVS, and Rite Aidbut only if youll use the item and will follow through on the rebate.
Buy enough of a sale item to last 12 weeks. Thats about how long sales take to cycle.
Shop at discount marts: Grocery outlet, The Dollar Store, etc.
Bring your own bags to the grocery store. Many stores offer a small discount per bag.
Take advantage of stores that double coupons.
Watch out for deals on things that your friends need, and have them do the same for you.