The Wall Street Panic of 2008

Panic: In economics, acute financial disturbance, such as widespread bank failures, feverish stock speculation followed by a market crash, or a climate of fear caused by economic crisis or the anticipation of such crisis.
-- Britannica Online

Make no mistake -- by this definition, what we've witnessed so far in 2008 is nothing less than a global market panic.

Acute financial disturbance? Freddie Mac and Fannie Mae imploded. Bear Stearns got "rescued" along with AIG (NYSE: AIG  ) , but somehow Lehman Brothers wasn't saved. Money markets "broke the buck," and there was a formal bank run on IndyMac.

Feverish speculation followed by a crash? Our housing bubble fueled excessive borrowing and risky lending practices, resulting in the credit crisis we're now dealing with. The S&P 500 is down 31% year to date, erasing the past five years of market gains.

Climate of fear? U.S. investor sentiment is at record lows, and the CBOE Volatility Index (the "fear index") has posted all-time highs in recent days. No one seems to know where the next shoe will drop.

The list, sadly, could go on.

Don't panic
Of course, no one wants to call this a market "panic." Instead, in most places it's been labeled a "crisis." In fact, the term "panic" hasn't been widely used to describe a market since the Panic of 1907 -- which is unfortunate, because understanding this as a panic has something to teach us.

In the 19th century (the high time for market panics), Yale professor William Graham Sumner defined a panic as:

... a wave of emotion, apprehension, alarm. It is more or less irrational. It is superinduced upon a crisis, which is real and inevitable, but it exaggerates, conjures up possibilities, takes away courage and energy.

In other words, the subprime and credit mess is the "crisis," and the "panic" is the exaggerations and doom-and-gloom language that come with it. We've seen plenty of that in recent months. Three of the world's major financial publications have likened our current economy to the Great Depression more than 250 times so far this year. So please, let's call this market by its proper name: the Panic of 2008.

Fortunately, "a panic," Sumner continued, "can be partly overcome by judicious reflection, by realization of the truth, and by measurement of facts."

Let us be judiciously reflective
So what do the panics of the early 20th century tell us about how we might overcome this one?

The last official panic -- the Panic of 1907 -- shook the U.S. economy to its core. Wall Street brokerages failed, depositors ran on banks, well-known companies went under, and the market's liquidity was in question. (Sound familiar?) In this instance, J.P. Morgan and friends famously put together $25 million to keep the market afloat -- a role now occupied by the Federal Reserve. By 1909, the Dow Jones index had more than recovered from pre-panic highs.

In 1914, the year the Great War began in Europe, the U.S. stock markets actually closed for nearly four months after foreign investors began pulling their money out of U.S. equities en masse to support the war effort. When it reopened, the market was devalued about 30%, but sustained rallies doubled that opening by the end of 1916.

Then, of course, came the Great Depression -- the single most important economic event in U.S. history -- which began with the Crash of 1929 and lasted arguably until the U.S. entered World War II in 1941. In 1932, unemployment hit 24.9%, and more than 9,000 banks failed during the 1930s. And there were no federally insured deposits until the Banking Act of 1933 created the FDIC, so when the bank failed, your money went with it. In fact, Wall Street's very future -- not to mention the economic model of capitalism -- was in question.

For those investors who had both the money and the courage to invest in the 1930s, it paid off. One man famously borrowed money to buy 104 U.S. stocks trading for less than $1 a share in 1939. Talk about investing at the point of maximum pessimism! Four years later, though, his money had quadrupled. His name, of course, was John Templeton.

OK, what's your point?
Judicious reflection, realization of the truth, and measurement of facts all say the same thing: We've seen markets like today's before -- and some far worse. And in every case, the point at which the market has turned irrational or overly pessimistic is precisely the time we long-term investors should have bought equities.

Despite the headlines proclaiming the next Great Depression, this is no Great Depression -- only a panic helped along by the short-term mind-set of the financial industry. Financial media's job is to attract readership by sensationalizing news events, and financial institutions, which are built on commissions and fees, want to keep money moving in and out in order to bulk up their own revenues. So both fan the flames of panic.

Individual investors like us do not have the advantage versus Wall Street when it comes to short-term trading, but we do have longer time horizons. Wall Street focuses on minutes, hours, and days, while we focus on years and decades. And that's what makes their panics a good time for us to buy.

Let's take the most modern example of market irrationality -- the dot-com bubble and subsequent burst -- and see what's happened to some quality names since the S&P 500 was near its low in September 2002.

Company

Returns (9/30/2002-Present)

Cisco Systems (Nasdaq: CSCO  )

80%

Oracle (Nasdaq: ORCL  )

113%

Schlumberger (NYSE: SLB  )

264%

CVS Caremark (NYSE: CVS  )

139%

Baxter (NYSE: BAX  )

127%

Adobe Systems (Nasdaq: ADBE  )

201%

Data provided by Capital IQ. Returns adjusted for dividends.

You didn't need to be a market genius to invest in these names in 2002. They were all well-known to both consumers and investors. All six had been beaten down considerably by the bear market, though, and that downturn presented investors with excellent opportunities to buy great companies at great prices.

Ironically enough, however, the third quarter of 2002 had the fewest equity-based mutual fund assets of the entire post-dot-com bust. Put simply, investors bailed on the market at exactly the wrong time.

It's still scary
Don't get me wrong -- some of the financial headlines we've seen over the past few months are downright frightening. But it's important to not join the panic, and to keep a long-term perspective on market panics, booms, crises, and everything in between. In this market, that means you should keep investing, and make sure you're diversified.

At our Motley Fool Stock Advisor investing service, Fool co-founders Tom and David Gardner had a lot of success picking up great companies during the post-dot-com bust. Their long-term focus helped them add names like Amazon.com at a time when the market wanted nothing to do with them -- and their picks are subsequently beating the market by 30 percentage points on average.

They're taking a similar approach now, and count top brand names such as Starbucks among their "best buys" right now. To see what else they're recommending, take a free, 30-day trial. Click here to get started -- there's no obligation to subscribe.

This article was originally published on Sept. 4, 2008. It has been updated.

Todd Wenning panics at the sight of clowns, but at little else. He does not own shares of any company mentioned. The Fool, on the other hand, owns shares of Starbucks, which is a Stock Advisor and an Inside Value pick. Amazon is a Stock Advisor recommendation. The Fool's disclosure policy keeps a steady hand.


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  • Report this Comment On September 04, 2008, at 2:44 PM, menelyik wrote:

    "judicious reflection"

    reveals that, based on present P/E's, the market averages are way, way overpriced.

    Based on reasonable future predictions, they are even higher. One has to conclude that the vast majority of stocks are being managed by people who have little to lose by following the crowd ... its not their money. One also has to conclude that the markets are likely to continue their erratic downward trend for many months or years to come, as continuing profit reports fall farther and farther short of what the "experts" like Motley Fool, have been telling people to expect.

  • Report this Comment On September 04, 2008, at 4:37 PM, aamire wrote:

    Todd, appreciate your point and I respect Motley Fools approach to investing. However, ''time to get in is right now!' is what individual investor subscribers have been listening to for many months, and in the process seen their equity erode week after week. Many boards, blogs, reports say big money is on the sidelines, why should then individual investors be advised to get in right now all the while?

  • Report this Comment On September 04, 2008, at 4:37 PM, swlaaggie wrote:

    menelyik - hmmmm - I guess I need to send some sternly worded e-mails to the companies I own who continue, quarter after quarter, to far exceed their earnings estimates. I keep reading/hearing the doom and gloom expectations from those such as yourself. Music to my ears as my dream list of a portfolio gets more realistic and less expensive by the day and with every passing gloom and doom article and comment.

  • Report this Comment On September 04, 2008, at 4:41 PM, swlaaggie wrote:

    LOL, it's a tough day to sell this kind of article. Okay, it's a tough week. Oh, alright, it's a tough year.

    Yes, it's been tough to see the dream portfolio frattered at the edges but as the article points out, it's not the first time this has happened. When we rebound off of this, it won't be the last time either.

    Doesn't anyone remember those horrible days in '87 and after 9/11? Talk about bleak and ugly.

  • Report this Comment On September 04, 2008, at 4:43 PM, JiveDadson wrote:

    The market is down about 20% from the top. If John Templeton had bought when the market was down only 20% from the 1929 top, he would have been waiting a long, long time to get well. He made his move a decade later. It's been only eleven months since the Dow topped out.

    A new wave of financial bad news is looming. There's political risk everywhere you look, particularly in Washington DC. There are undoubtedly winners to be picked. The same is true at the horse race track. But the vig is a powerful opponent. Housing and equities are still greatly over-priced in general.

    I guess it's true what they say. "Fools rush in." Good luck to you.

  • Report this Comment On September 04, 2008, at 4:45 PM, JestInTime828 wrote:

    Good article Todd, except you forgot at least one part of vital information.

    The 1907 panic was engineered by none other than John Pierpont Morgan spreading rumors that the Knickerbocker Bank was insolvent thereby causing a run on that bank.

    Isn't it interesting that 'ole JP graciously stepped in to put together a bailout package?

    This was a concerted attempt to demonstrate the need for a central bank and lo, and behold within 4 years, the Federal Reserve Act of 1913 was passed just before the Christmas holiday on Dec. 22nd by the House and Dec. 23rd by the Senate.

  • Report this Comment On September 04, 2008, at 4:50 PM, JestInTime828 wrote:

    ... sorry should have been within 6 years ...

  • Report this Comment On September 04, 2008, at 4:52 PM, JiveDadson wrote:

    Swlaagie, I remember the bleak days after 9/11. I had been all cash since February 2000. That's 19 months.

    Sometimes you just need to hide and watch.

  • Report this Comment On September 04, 2008, at 5:01 PM, JiveDadson wrote:

    JestinTime828, history repeats. Or was that a rhyme?

    In March, there was a run on a big investment house. Investigations of malicious rumors are now underway. The bank of the ghost of JP Morgan graciously stepped in to put together a bailout package. This time the bailout was underwritten by the Federal Reserve bank that JP Morgan and his cohort founded.

  • Report this Comment On September 04, 2008, at 11:36 PM, CrankyTexan wrote:

    On days like these, I ask myself what I would do if I suddenly inherited a million bucks. My answer is that I would buy stocks right now because so many of them are dirt cheap. Since I would buy today, it doesn't make sense to sell today. Let the media spread their gloom and doom. I am not selling.

  • Report this Comment On September 05, 2008, at 8:59 AM, huffanpuff wrote:

    could it just be that this was ordered , oops orchestrated by a particular pol party's well placed operatives in the fin media to keep up the absurdity that times are bad and the savior will make us all better. talk about using someone else's money!!

  • Report this Comment On September 05, 2008, at 9:56 AM, RaulChapin wrote:

    As I was beating myself over having overpaid 500$ for my Pontiac Vibe my boss told me: "Think of it for the lifetime of the vehicle. Will 50$ a year for 10 years be worth your worrying, plus how much gas are you saving by changing from you 92 Lumina to the Vibe you were going to buy ANYWAY" I am saving 25$ a week in gas by having switched vehicle, yes having paid 500$ less would have been sweeter but in the long run my decission was still coherent.

    How is this relevant? Well if Today you decide to get advice from the Fool, do your homework, find the perfect company for your portfolio and finally buy it at say price X, It is still possible or even probable that tomorrow you will find your company priced at 80% of X. Will you (like me with my car) feel like an idiot for not waiting another day? Or will you (like my more experienced boss) realize that 10 years from now, when the company is priced at 500%X the extra gainings would feel good if they were there, but not necessarily be the main concern?! Yes by waiting a day you could have 125% X more than by acting today but by not acting you might have just your original cash.

    The thing is that no one knows for sure that tomorrow will be a better or worse day for buying said company. So you accept a level of risk (say the 20% of the example) but you look at the remaining 80% of profit and decide to act now. The Fool is not about perfection or being right 100% of the time, they are about helping average people be right 80% of the time instead of being ultra conservative and making 3% for sure on their GICs

    Disclosure: I am not a paying member of the Fool, the main reason is that I follow their advice and I am waiting till my portfolio is of a decent size to make it worth paying for advise + paying the hefty canadian fees for investing. Till then I am investing in a very low fee Index tracking fund. And enjoying the free advice of both Fool staff and Fool members who happily show both sides of the coin everytime.

  • Report this Comment On September 05, 2008, at 10:33 AM, biotechmgr wrote:

    More soothsaying in an unprecedented and dangerous market. People, do not listen to these articles. They will try to keep you in the market while it goes all the way down to fantastic losses.

    Markets do not always go up in the long run. Bear markets can last for a decade. I believe this one will last quite a long time.

  • Report this Comment On September 05, 2008, at 10:51 AM, SteveTheInvestor wrote:

    I'm not panicked. I have been moving slowly but surely to cash though. Currently, I'm about 60% cash. Stocks stink. Bonds stink. The best I can hope for is to not lose what I have. I'm down a BIG chunk already on virtually all my SA stocks (among others). It's time to stop the bleeding. I'm also not going to make grabs for more falling knives, lest the bleeding begin all over again.

    I don't yet see a light at the end of the tunnel in regards to housing, inflation or the economy in general. If a light does appear, it's likely to be a freight train coming at me. I have zero faith in this market.

  • Report this Comment On September 05, 2008, at 11:12 AM, Stoat1004 wrote:

    Translation: Whatever you do...DO NOT SELL!!!...The investment banks are broke...and you certainly don't want your money back now do ya?

  • Report this Comment On September 05, 2008, at 1:54 PM, madzie wrote:

    Retired w/ American Funds in a

    tradional IRA and lost about 100k this year. Do have some laddered CD's thru a local bank. Any thoughts on what to do.

  • Report this Comment On September 05, 2008, at 2:13 PM, RaulChapin wrote:

    I presume Stoat1004 does not work as a translator or at least we would hope so. A more accurate translation: If you own a company that has a fundamental problem, sell it as quickly as you can. If you own a company which is grossly overvalued even though it is a good company, sell it once you know where to put your cash. If you have money that you can invest without expecting it back for a long time, then now is a good oportunity to look for companies with great fundamentals which are at a discount price because there are many people scared of the near future.

  • Report this Comment On September 08, 2008, at 11:47 AM, golfamatic wrote:

    I dollar cost average, and every month put 10% of my take home into a Total U.S. Market Index fund. The exception is when the S&P500 is down 10% or more YTD, then I put 20% into the fund.

    Buffet has said it many times and in different ways; but when the market is selling, YOU should be buying. Don't follow the herd. Buying these funds now at bargain prices will pay off down the road, trust me.

  • Report this Comment On September 08, 2008, at 2:59 PM, seitzdogg wrote:

    I want to believe this article, but the hedge fund liquidation right now has me very spooked. I feel that some of the best investments out there (e.g. Google) are great values now, but continues to be driven lower daily by hedge funds needing to pay back their clients that are pulling out of the fund. When do you sell what you hold now and wait for all the selling to halt??

  • Report this Comment On September 10, 2008, at 5:18 PM, vest0r2 wrote:

    When do you punt? Cut and run? After 30% losses? 40%? 50%? Or do you just watch your investments fritter away down to nothing? Because that's where they're heading.

  • Report this Comment On September 10, 2008, at 5:21 PM, breathless9 wrote:

    I agree with the basic logic of buying when everyone else seems to be selling during panic times. Acting on that principal, I looked at The Bank of Ireland and liked what I saw: A strong bank in business since the 1700s, good

    dividends, P/E of 3. Yet the bank is under stock pressure for Guilt By Association. S'OK, I can wait for it to go back up after having bought at an attractive low price. Surely there are other great buys out there, too.

  • Report this Comment On September 11, 2008, at 1:59 AM, dividendgrowth wrote:

    This bear market will be over when die-hard holdouts such as AAPL, AMZN, BIDU, FSLR, GOOG, ISRG, RIMM have fallen 70% from their peaks; and great blue chips such as BRKA, GE, JNJ, KO, MCD, PG, PM, WMT, XOM have fallen 30-50% from their peaks.

  • Report this Comment On September 12, 2008, at 11:54 AM, faneur wrote:

    2008 a panic? There is one element missing. The market has only declined 20% from high to low. the 1929-1932 decline was over 80%. Even 1973-1974 was about 50%. If SPY hits 75 to 80 it might be the result of a panic. *

  • Report this Comment On September 12, 2008, at 11:54 AM, 6damon9 wrote:

    Call it a panic or crisis or crash or whatever; I'll use Dmitry Orlov's terminology and call it collapse. See http://cluborlov.blogspot.com/2008/02/five-stages-of-collaps... for a chilling perspective.

  • Report this Comment On September 12, 2008, at 11:56 AM, 6damon9 wrote:

    Call it a panic or crisis or crash or whatever; I'll use Dmitry Orlov's terminology and call it collapse. See http://cluborlov.blogspot.com/2008/02/five-stages-of-collaps... for a chilling perspective.

  • Report this Comment On September 12, 2008, at 12:17 PM, docwife wrote:

    What is making this downturn extremely stressful is the total lack of confidence in insitutions that should have had safeguards in place to prevent this meltdown. Everywhere you look -- mortgage brokers, big banks, Wall Street aristocrats, Fannie and Freddie, Congress -- you find people who failed to behave prudently. In my youth, you needed 20% down to buy a house worth 21/2 times your income. You didn't get a credit card until you were out of college and had a job. You didn't use it except for emergencies. When a small investor cannot count on the prudence of supposedly professional financial institutions, you feel like you are swimming with sharks.

  • Report this Comment On September 12, 2008, at 1:24 PM, visard wrote:

    The Peter G. Peterson Foundation, former Sec. of Commerce, reports that the US is in a $53 trillion financial hole of which $40 something trillion is entitlements. A growth rate in the double digits for greater than a decade would be required to grow our way out. By comparison, in the best years of the 1990's GDP was around 3.4%.

    Oil production has peaked and the masses are clamoring for drilling today knowing that offshore and ANWR resources are limited and years away. How does judicious reflection enable us to envision a way around this mess?

  • Report this Comment On September 12, 2008, at 2:08 PM, visard wrote:

    Just to complete the thought - I think we are in a historically unique position and precedent may no longer apply.

  • Report this Comment On September 12, 2008, at 2:12 PM, cassandra124c wrote:

    I note that Templeton waited from 1929 until 1939 to invest in $1 stocks. Should I wait 10 years too?

  • Report this Comment On September 12, 2008, at 2:16 PM, mp1121 wrote:

    The market is still not at '73-74 PE levels. The person who commented that Templeton bought in '39 not '29 was right on the money. Our economic future is the Japan of the '90's. Who are the taxpayers going to bail out next?

  • Report this Comment On September 12, 2008, at 2:38 PM, DukeofWanque wrote:

    I did not see anybody provide a reason for the panic other than oil. I agree there is enough oil for 100's of years. Two caveats - first it takes a minimum of 10 years to develop a field of any consequence and secondly there is limited refining plants and they can take 10 years or longer to build.

    But my main point is - DEBT. The punch line to this horror story for our children is USD$ 99 Trillion plus!!!

    “When many Americans think of debt and deficits, their knee-jerk reaction is to blame the war in Iraq, or defense spending. Some people think that we can solve the country’s financial problems by stopping fraud, waste and abuse, or by canceling the Bush tax cuts. The truth is, the United States could do all three of these things and still wouldn’t come close to solving the nation’s fiscal challenges.

    Estimated Current Federal Debt / Federal Government Debt Obligations / State Debt / Private Debt / Corporate Debt / Derivative Exposure;

    FEDERAL GOVERNMENT: [Per America’s Total Debt Report by MW Hodges; 80% of today’s debt has been created since 1990; Fed debt in 1957 was 693 Billion and is now 76 times that amount…

    --- U. S. DEBT – GOVERNMENT – PRIVATE – BUSINESS ---

    1. U.S. Governments Debts in U.S. Dollars: U.S. Dollars

    a. Public Debt: ~11 Trillion plus;

    2. U.S. Government Unfunded Debt Obligations:

    b. Social Security: ~ 7 Trillion

    c. Medicare (A&B): ~26 Trillion

    d. Medicare (D): ~8 Trillion

    Subtotal: (Works out to be $175,000 per person) USD$ ~53 Trillion

    Potential Losses from Fannie Mae/Freddie Mac: Approx. ~1T / 2 Trillion

    [ Note: We are running an estimated 400B to 1T deficit a year now –

    which means we can’t pay our debts each year and must borrow

    more and the interest on ~11 trillion is rather large. no

    balanced budget in sight – if your congress to balance the budget

    you must make some one mad and take away their entitlement,

    expense account or lower their ridiculous benefits and salary]

    OTHERS:

    3. Individual States & Local Governments Debts Total: ~ 3 Trillion

    4. Private Individual Debt Total: Estimated at ~13.8 Trillion

    [Credit Cards, Auto & Mortgage Debt]

    [Personal Credit Card Debt is ~2.5T of that total]

    5. Corporate Debt Estimated at ~10.1 Trillion

    [Auto Industry, Mfg Industry, Agricultural Industry, Wine & Spirits, etc.]

    6. Private Financial Sector Debt Total: Estimated at ~15.8 Trillion

    [Domestic / Banks, Security Houses etc.]

    7. Lucky Number 7 – Not For Us But Somebody…

    ***The Magic Bullet” that gets us all – Financial Derivatives***

    ~USD$490 Trillion in Derivatives World Wide

    U. S. Bank & Financial Institution Financial Exposure Estimated at ~2.5 Trillion

    Opinion – I believe this will take down the house…….

    ESTIMATED TOTAL MONEY OWED BY US GOVERNMENTS,

    INDIVIDUALS AND BUSINESS. A GRAND TOTAL OF ~USD$ 99.2 Trillion

    Take out some that may not happen (probably will but we could get lucky and we would only owe USD$ 85.2 Trillion. What is a few trillion here and there.

    "Foreign interests have more control over the US economy than Americans, leaving the country in a state that is financially imprudent. More and more of our debt is held by foreign countries – some of which are our allies and some are not. The huge holdings of American government debt by countries such as China and Saudi Arabia could leave a powerful financial weapon in the hands of countries that may be hostile to US corporate and diplomatic interests.” David Walker, the US comptroller general. 23 July 2007

  • Report this Comment On September 12, 2008, at 2:59 PM, sanjosemike wrote:

    ASSET ALLOCATION MODEL STILL VIABLE

    We have seen these kinds of markets before, and worse. We have seen these kinds of failure of regulations, and worse. We have seen these kinds of bank failures and worse. We have seen these kinds of failures of liquidities and worse. We have seen dropping of not one but two atom bombs in time of war, all before now.

    Despite all of this, the stock securities markets have produced a return of about 7-10% over inflation on the long run.

    It doesn't make any sense to hide your hard earned bucks under your mattress.

    I see this downturn going at least another 2 years, possibly 3-4. I'm old enough to have seen all of this before, and I have.

    Decide on your asset allocation. If you cannot tolerate risk well (as many investors, who say they can...but actually can't) reduce your stock ownership percentage to what you can tolerate.

    This article is correct about one thing: News media loves DISASTERS because it sells. There is nothing "interesting or exciting about an asset allocation" program. Boring doesn't sell.

    Don't expect an upturn anytime soon. This doesn't mean that you should continue with your AA of 90% stocks!

    Keep to your investment plan. I did, throughout thick and thin. I am much older than most of you. I have seen it all.

    My asset allocation program is now about 50% stocks, 50% bonds and personal notes receivable.

    I don't depend on day to day fluctuations. That is where ALL of you want to be.

    Panic is not a part of my proven successful investment strategy.

    sanjosemike

  • Report this Comment On September 12, 2008, at 3:16 PM, ainewgate wrote:

    Still fully invested; down 20%, that hurts. Did you say "no hurt, no gain"

  • Report this Comment On September 12, 2008, at 4:26 PM, visiblehand wrote:

    the reason i've been investing this year (started about 2-3 months ago), is becasue i see the inevitability of the green revolution about to occur. Coupled with the fact that almost all stocks are near their "respective" lows I thought this market could benefit me. Sadly, i've lost about 10% in that short time. Now i look at my stocks and buy a bit more of the ones which have lost the greatest percentage. I've invested over 20k in this short span. This is my first attempt at the stock market. The situation is a bit disheartening but I do know that the alternative energy sector will have its boom and we are coming close to it.

    This presidential election will no doubt have a dramatic effect on the "gloom" perception, it offers a new start of sorts for the economy and will shift our confidence to new growth opportunities.

    I won't hide it. I support Obama. However, its inevitable that Mccain will also have to adapt to the green revolution. However, i've noticed that since the primaries, when Obama has his momentum the shaky market responds positively. If we were to get on track of really demonstrating a new role and vision for our economy, popular momentum will change this economic downturn drastically and a viable and sustainable growth will be achieved with responsible use of our resources and harnessing the energy we've ignored for far too long (solar/wind/biofuel energy, etc...) by hanging on to the old order gain short term success (ie. war profiteering). War and irresponsible ways of making money have run out of steem and we are collectively feeling its wrath while a few reap huge rewards. The invisible hand of nature's economic sense will change our wasteful ways and open the door to new sustainable opportunities.

  • Report this Comment On September 12, 2008, at 5:31 PM, ringoes wrote:

    DukeofWanque is absolutely right but he doesn’t go far enough.

    When the government took over Fannie and Freddie they assumed $5.1Trillion dollars in mortgages financed by $5.1 Trillion in bonds held by individuals, foreign governments, and retirement funds, etc. Now, I don’t accept all of his ‘debts’ but even if we just take the $10 Trillion in US bonds and $5 Trillion in Fannie and Freddie that’s $50,000 per person; or $250,000 per family. With family annual income at 40-50K; how can we ever pay it back?

    The next issue is jobs. The manufacturing jobs have all gone to China and India; leaving us as a service economy. But what does that mean? A service economy exists to service a manufacturing economy. Who is going to buy all those hamburgers and fries? The same people who make them? A service economy cannot survive alone! Same with a Walmart economy: low priced goods imported to sell to people with no jobs!

    Next is the tax code. In the 60’s a Donald Trump would pay 70% on his ‘last dollar’ – (it worked out to about 45-55%). Today he pays 15% period! Meanwhile a construction worker earning 80K pays 45%! Is it any wonder that income disparity in this country hasn’t been this high since the great depression? Let’s not even talk about ‘wealth disparity’. In simple terms look at it as a game of monopoly or poker: once one person gets all the money; or all the chips: GAME OVER!

    The next issue is that with all the loosening of bank regulations; there is no way to tell a bank from a brokerage house. What exactly is the discount rate for a Freddie, Fannie, Bear, or Merrill Lynch? They issue money too in the form of bonds. Here is a quote from some one much smarter than me:

    "I used to give a lecture explaining that the Great Depression could never happen now because of the regulations that emerged from that crisis, but we’re learning that there is a shadow banking system, of hedge funds and investment banks, that are outside of those safety nets. What happened to Bear Stearns last week looked a lot like a 19th-century run on the bank."

    Barry Eichengreen, an economist at the University of California at Berkeley.

    The final result is that the money supply has exploded! So much so that the government no longer reports it – they simply don’t know what it is!

    It’s time we stopped arguing about IF a depression will hit.

    The only question I want help with is how to survive one. I pulled out of the market in January. But afraid that all of the above will result in tremendous inflation; in April I put it in utilities; only to see them drop 7-10%!

    Panic maybe an appropriate word for people selling utility stocks; but anything else is just common sense.

  • Report this Comment On September 12, 2008, at 5:38 PM, SafeAndCheap wrote:

    "Financial media's job is to attract readership by sensationalizing news events, and financial institutions, which are built on commissions and fees, want to keep money moving in and out in order to bulk up their own revenues, and so they fan the flames of panic."

    And the Fool's job is to attract readership to buy its services, which are based on a marketing theme: selling the secret sauce whereby the average guy becomes well off through stock investing.

    Perhaps this market is like other, non-Great Depression downturns. Perhaps not. The US government is quickly becoming the backstop of last resort for a frightening number of financial meltdowns. (There's 12 zeros in the $5 trillion Fannie and Freddie are playing with.) And the US government wasn't in much of a financial position to take on this responsibility.

    In either case, the Fool's incentive is to keep up the happy talk about stocks. The Fool is not a neutral party.

  • Report this Comment On September 12, 2008, at 6:06 PM, cmolinel wrote:

    I have been telling my friends "do not worry... its only panic..." since the beginning of the year.

    Those who panicked saved a lot of money. I did not.

    It is a case of self fulfilling prophecy.

    If people think that stocks will go down, they will go down because they take their money out the stock market .

    It does not matter if the original assumptions were the right ones or not. The issue is that there is no money to buy more stocks and, on the opposite, the institutions are desperate to make cash, pushing prices down.

    Where the demand for stocks will come from? From the public, when they decide to convert their other assets in stocks.

    Now they are panicked, with good reasons.

    A signal for the bottom could be when the funds have again fresh cash.

    Currently, cash as % of their assets is at an extremely low point.

    Perhaps it will take more than 5 years to recover the confidence on the stock market. Plenty of time.

  • Report this Comment On September 12, 2008, at 7:35 PM, fixedincomesecs wrote:

    Whenever we are in a correction, it feels like the worst stock market ever! I was an OTC trader for Merrill Lynch in the 60s. In 1969 and 1970 over 20% of the New York Stock Exchange member firms disappeared, including Goodbody, the 5th largest on the exchange (like Bear Stearns). Goodbody was sold to Merrill Lynch for $1.00. Then came the oil embargo of the early 70s. That six or seven year period felt like the end of the world. Employment in the financial services industry dropped by nearly 40%. That was our own little depression. We survived only to be hit by high inflation and high interest rates in the early 80s. We survived all that and even thrived. Today's problems will, also, pass.

  • Report this Comment On September 12, 2008, at 8:39 PM, foolishGI wrote:

    When I see people quoting the exposure in the Fannnie & Freddie mess, It is always in terms of the total mortgage service held by the two institutions. I know I am in IRAQ and can be somewhat out of the information loop at times but I have yet to hear that the failure rate on Fannie & Freddie backed loans has reached 10%. Even when it reaches 10% taxpayer exposure would be on the order of 500 billion $ not 5 Trillion. And that is prior to the recouping of funds after the sale of foreclosed properties. Assuming that resale recoupes 50% of the value of the loans that are forclosed upon, even at a 30 % failure rate the taxpayer coverage is still only 12.5% of the total.

    I disagree with the bailout on principle, Fannie & Freddie did it to themselves with automated underwriting that allowed 65% Debt to Income ratio's, twice the traditional guidelines of 36% max total debt to income. Coupled with low and no documentation loans (i.e. no proof of income) they set themselves up for what happened. But to cry out the 5 trillion $ total as the taxpayer exposure is irresponsible fear mongering. Most Americans still pay their mortgage, and will continue to do so.

  • Report this Comment On September 12, 2008, at 9:46 PM, UpsideHunter wrote:

    Agree with FoolishGI's numbers. Fannie and Freddie will never have 100% of their loans go bad. But they don't need to. Already 9% of US mortgages are past due, and the resets are just beginning. The bailouts are growing -- Bear, Fannie, now the US auto industry? How about the airlines? The home builders?

    All this on top of spiraling, huge deficits, growing unemployment, etc. This one is still just beginning, and it will not end well. Someday, stocks will bottom and be REALLY cheap. For now, the best strategy, for those who don't want to short, is cash and canned goods.

  • Report this Comment On September 12, 2008, at 9:55 PM, SafeAndCheap wrote:

    re $5 trillion for Freddie Mac and Fannie Mae.

    The $5 trillion is a liability, not a loss. The taxpayer is exposed to the $5 trillion as a liability. The shear size of the liability makes the US Gov balance sheet look awfully ugly. This has a significant impact on the government's room to maneuver

    The point is: the credit crisis has reached the point where people are forced to look to the government as a backstop. And when the government loses it's room to maneuver........

  • Report this Comment On September 12, 2008, at 9:59 PM, AriasPalm wrote:

    "The invisible hand of nature's economic sense will change our wasteful ways and open the door to new sustainable opportunities." Better think again, if you are an Obama supporter, his pledge to raise taxes on everything that he can think of (and some he hasn't, no doubt) will plunge us over the edge. Economics 101 reveals that if we lower taxes commerce thrives, raise them and it kills the economy. I think about selling every day but I don't, I am in for the long haul. Remember, if you are not planning on spending it tomorrow, leave it where it is. Ten years from now you will be glad you did.

  • Report this Comment On September 12, 2008, at 10:25 PM, bigongit1 wrote:

    Invest with money you don't need to live on right now. If you need it now, don't invest it. You have to have confidence that the markets will eventually recover, right? What we're seeing, with the exception of the of frighteningly rapid failures in the financial industry, is extreme volatility. Were you tempted to jump into Frannie or Freddie? Well if you did, it should have been with money you were prepared to lose entirely. There are long term investments, and there is short term trading. I think that's what the fool is trying to tell people about the former. So, your portfolio is down 20-30%, and you are understandably unhappy about this, well, welcome to the club. But it's only a loss if you sell it. Keep looking for opportunities, and try to stay optimistic. *go Chicago Cubs & Bears!*

  • Report this Comment On September 12, 2008, at 10:27 PM, 60wall wrote:

    TMF does an excellent job of combing through historical data, picking statistics/examples that suit their purposes, and citing, see, if you "stay the course" you will beat the street. Often, they seem quite irresponsible. I agree that things will probably turn around in the next year and a half, but there is some risk that their invest now strategy will be devastating. But what does TMF have to lose. They convince people that they are better than the professionals by investing now. If things turn around, they look like sages and their readership increases. If things go south, they keep their readers longer. After all, who would really be interested in reading TMF if they were saying go all cash.

  • Report this Comment On September 13, 2008, at 7:26 AM, foolishGI wrote:

    The housing "crisis" as it is currently playing out is the perfect example of the Fool's investment strategy. In many markets, we have seen a 20% correction in housing prices, more in some markets. When I left the states on assignment housing prices were inflated beyond reason, the market I lived in had seen 10% growth in home values since 1990. By my research, at no time in American history had such growth in value been sustained for so long. A correction was due.

    Those people who are currently feeling the pinch on their investments in real estate are like anyone else in any other investment who got in late. People with more than five years in their property are worried about their values but have not seen values drop below original purchase agreement. (I know that is a general statement and that there may be isolated cases, however the premise holds).

    I have every intention of buying real estate upon my return to the states.

  • Report this Comment On September 13, 2008, at 9:11 AM, ringoes wrote:

    I use the 5 Trillion total liability of Freddy and Fannie because of the total picture I laid out.

    Today, basically all institutions that hold mortgage 'instruments' are technically bankrupt. Take Bank of America; it has the greatest cash reserve of any of the banks 217B in cash and 129B in short term for a total of 346B. But it's long term 'investments', aka mortgages total 1.1Trillion. Give the fall in housing prices of anywhere from 10-30% (some predict even 50%) those investments could now be worth only 770B; which would drop its total assets to 1.37T (all numbers as of 12/07 - yahoo finance) minus liabilities of 1.57T and it has a negative value of 20B. And as June it lost another 19B.

    Is a panic based on such facts still a panic?

    Getting back to Freddy and Fannie and the $5T; they own the worst of the worst of those mortgages. And from what I have read they own 50-70% of all mortgages. Now while I do find that hard to believe -- if those numbers are right and we expect a 50% drop in home prices, Freddie and Fannie are going to go down first -- 100% down; $5T down; and the BoAs are going to go down 50% because the glut of homes will devalue even their higher quality mortgages.

    Here is what KENNETH D. LEWIS,

    CHAIRMAN, CHIEF EXECUTIVE

    OFFICER AND PRESIDENT of Bank Of America had to say in his 07 annual report:

    "We escaped direct losses from sub-prime lending, which we

    had exited years ago. But we did experience large write downs in the value of structured products backed

    by such loans, and our trading results were poor."

    "At Bank of America, our exposure in CDOs was significant."

    Well, if his exposure was significant in CDOs then he did not escape the sub-prime fiasco. And in this post-ENRON era; I don't trust these guys as far as I can spit.

  • Report this Comment On September 13, 2008, at 1:11 PM, rlaw68 wrote:

    Dollar. Cost. Averaging.

    Don't get me wrong, the debt's a big deal that we'll have to deal with, but the point it, we'll *have* to deal with it, so we will (big changes in entitlement programs a'coming)

    That said, technology will lead the rebound, and not just in the short term: green tech, biotech, and good old regular tech companies.

    Plus of course the better managed natural resources and utility companies.

    Think about what "green" tech implies: auto and building tech, mining and other extraction tech, air/water purification tech...the list goes on but the next big multi-trillion dollar industry is around this.

    A desire for increased longevity and quality of life along with finite resources are what likewise give me confidence in biotech and utilities.

    To be sure, there will be hits and misses a plenty, and the current crisis is nothing to be sneezed at, but neither is the sky falling.

    Finally, the ownership of a lot of U.S. equity by foreign markets may indeed limit our flexibility in the future, however it also necessarily binds them closer to us and perhaps -- just perhaps -- it brings us all closer to the realization sooner rather than later that we're all in this together.

  • Report this Comment On September 14, 2008, at 12:17 AM, SurethingDan wrote:

    Why is it that anyone and everyone who has anything to do with the securities industry whatsoever , from the CEO to the doorman to this newsletter, is yellin'...BUY! BUY! BUY!

  • Report this Comment On September 14, 2008, at 12:14 PM, greenlady88 wrote:

    I don't do investment for the short term and my portfolio is doing very well. I do think it is time to buy right now if you have extra cash and if you think about it in terms of 5 years investment at a minimum. The sustainablity sector is a great sector to look at. But I would look internationally not nationally. There are other countries that actually support alternative energies. The other sector that is good is anything that deals with elderly people.

    What prompted me to comment though was the comment on taxation. In Scandanavain countries, they have health care for everyone, they have a low population growth, they have public transport their population is very well educated. They work lees too and they pay a lot more taxes than we do. The problem as I see it is the rich in this country don't pay their fair share nor do corporations. In my humble opinion we should do away with the corporation's "personhood". It comes with to many "priviledges". Our government is broken.

  • Report this Comment On September 15, 2008, at 1:31 PM, venkytalks wrote:

    This is a collapse in slow motion. People did not see the writing on the wall in 2007 and early 2008. They are going to continue their blindness as usual. The short term media blitz focusses on small events. The biggies are also evident.

    My predictions:

    1. A ten year period of no long term gain from US stocks. Only money to be made from short term volatility

    2. A long slow recession in US that never gets over (for 10-20 years)

    3. The next big event: Chinese bank collapses and writedowns followed by Chinese market fall of around 100% of current levels (Shanghai near 1000)

    4. Oil price collapse to $60 and will stay there for 10 years despite volatility

    5. Slow wind down of alternative (expensive) energy stocks and green stocks.

    6. Lots of pain for US old people as retirement and medical costs for the retiring baby boomers push down living standards

    7. Possible government melt downs in China, India, Russia and Brazil (BRIC) with global political uncertainty

    Its a time for high yield safe bonds in some safe countries. Rest is unsafe.

  • Report this Comment On September 16, 2008, at 1:40 AM, mybestfriend wrote:

    I have been struggling for weeks as my portfolio has plunged down, and today I made the horrific decision to sell everything I was holding. I have used a financial money manager who bought alot of large cap well known companies. I am well diversified, and owned alot of international stock. It has occurred to me that it the market rebounds, I will have lost alot of stock in great companiew., and maybe if I held on, things would improve. I have listened to my stock managers all year and I have lost about 40% of my value. I am just too scared of losing everything to stay invested. When the market picks up for a couple of weeks, then I will reinvest. Alot of my losses were due to the fact that my financial investor bought stocks when they were really high, and although the companies are financially sound, (Walmart, Exxon, GE, )they are plummeting in this financial gloom. Does Motley Fool think that people who were already invested in basically good sound companies should hold on, even when they are going down? How do you know when enough is enough?

    Decisions suck

  • Report this Comment On September 16, 2008, at 3:32 AM, shamus107 wrote:

    I was one of those people who saw similarities between this panic and the Great Depression, but your discussion of this historical event and similar events although brief was illuminating.

  • Report this Comment On September 16, 2008, at 4:27 AM, dtkw wrote:

    I don't agree with venkytalks's veiw regarding "Possible government melt downs in China, India, Russia and Brazil ...". At this moment, both China and Russia are politically stable countries. For China, even setbacks in the financial market will not stop its economic growth that will continue for many years to come.

    Regarding "Its a time for high yield safe bonds in some safe countries. Rest is unsafe", I wonder what he is referring to ? Years ago bonds from Fannie Mae and Freddie Mac were supposed to be ultra safe too !!!

  • Report this Comment On September 16, 2008, at 8:11 AM, venkytalks wrote:

    Re: dtkw's comment, current govt stability can be shaken up in many scenarios.

    1. In China, if banks fail, investments tank and recession sets in. People there tolerate a lot because the govt has delivered fantastic growth for 25 years. Already common people have lost 60% of their stock portfolio. If they lose their jobs as well, it will be the last straw. Harsh measures from govt will only increase people's anger

    2. In Russia, if oil price collapses to less than 50$. Their main source of wealth will dry up. If a weak govt takes charge in Russia, many old Soviet SSRs will try to break away. If a very harsh right wing regime takes over, same problem. Either way, their economy will go nowhere.

    3. In Brazil, if there is a global recession and commodity prices collapses, hard left govt may take over and cause problems (especially Chavez style.)

    4. In India, poor law and order can embolden extreme left groups (Maoists, Chinese financed). The govt writ may not run in large parts of the country. Similar to the way Chinese supported leftist terror groups have taken over the Nepal govt. North east states and Kashmir may also see separatist violence.

    I am not saying all four countries will collapse, maybe none. But risks exist.

    Re: Bonds, I meant govt treasury bonds, (not necessarily US, due to low yields.)

  • Report this Comment On September 16, 2008, at 1:59 PM, foolishGI wrote:

    ringoes;

    your all or nothing approach to this subject is a major part of the problem with the market and the economy in general. As I have said before, every American homeowner is not going to default on their homeloan. Every single loan issued by Fannie and Freddie were securitized by the property for which the loan was made. That means that there will always be intrensic value in the loan made. 50% value recouped at resale, as I stated before, would represent a net 15% loss at a default rate of 30% of all loans held by Fannie and Freddie. (in my earlier posting I quoted 12.5%, that number was incorrect due to sleep deprivation during a 3A.M. posting Iraq time.) Not all loans held were subprime loans, and not all subprime loans will default. Short term that level of loss sucks, but can be survived with steady nerves and a long term outlook.

    Anyone who has bought a home with financing knows that over the life of a loan you pay nearly 300% of the value of the amount borrowed at interest rates of 6.5 to 7.5% for a 30yr fixed loan. Actual dollar amounts are specified at the closing meeting for each loan prior to signature. I bring this up only to illustrate the long term value of every single loan that does not default, that is still the vast majority of the portfolio of Fannie & Freddie.

    Fannie & Freddie margins would be in a lot more danger long term if every nondefaulting home owner discovered the means to pay off their home loans in 15 to 22 years instead of 30 years.

    Five years will show that Fannie & Freddie lost far less than 15% of their portfolio value.

  • Report this Comment On September 18, 2008, at 12:22 AM, RonaldSills wrote:

    I have been out of all individual stocks since November of 2007, except for 2, KO and BRK.B. I follow William O'Neill's CANSLIM investing style. IBD has said in no uncertain terms to go to cash for several weeks now. Now is most likely NOT the time to be buying stocks, according to IBD. My problem is that 45-50% of my money is invested in 10 various mutual funds: Large Cap, Small Cap, Mid Cap, International, etc. O'Neill's rule for mutual funds for when to sell is... NEVER! One NEVER sells a mutual fund except under unusual circumstances. So I've been holding on to these funds since Dow 14,000, and the NAV of the funds goes steadily down. Today I tallied up huge losses, as I'm sure everyone did who has funds, 401K's, etc. My funds are down anywhere from 12 - 22% since I bought them in January of 2007. So this is hard to watch, and hard to follow O'Neill's rule, but so far I've held fast. Jim Cramer was pessimistic today about the market, does NOT think we're anywhere near a bottom. My emotions say "Get Out!". I'm 55 years old, and don't have decades to work with. Maybe I'm holding too many stock funds (as opposed to bonds) for somebody my age, approaching retirement. Oh boy, what to do, what to do... Just sit tight, I guess.

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