Friday, October 24, 2008

You Thought September Was Bad.

By now, most people have received their September investment statement. The first question is “Did you open it?” Well if you did open it and thought it was shocking in the amount of money you had lost in account value wait until you see your October statement. As of today, the S&P 500 was off just about 24% for the month. If your accounts performed in line with the market for the month of October then $100,000 in account value at the end of September should be worth $76,000 at the end of October. We still have another week to go before the end of the month and we could see some recovery, but only time will tell.


Why is it that some people who have the same investments that they had at the end of September will not be off near as much as the market by the end of the month? There are two basic answers to that question. First, they have a much higher percentage of their assets investing in preferred stocks that pay a high dividend. The second reason is that most of the preferred stocks were in the financial services sector.


When the Federal Government said that the banks were "money good" guaranteeing the banks debt, then the market rallied almost 1,000 points. The big winners then and continue to be the financial sector especially the preferred. I wrote recently about preferred stocks and I pointed out that they are senior to common stocks and therefore should be more stable in price. The government did not bail out other companies so the strength in the preferred stocks of financial companies has regained favor. As the markets finally figure out where the bottom is, the financial stocks will lead the rally.


The fear of recession will cause the Federal Reserve to move their bias towards cutting interest rates as it will state that inflation is no longer an issue in its meeting "statement "next week. It is possible that the Fed may cut 25 basis points and it will, I believe the Fed will take one full percent out of the Fed Funds interest rate before it is done cutting interest rates. As order returns to the markets the financial services preferred stocks could have quite a run.


Here is a test question for you. If your account is off 40% like the markets, how much will the market have to go up for you to recover what you have lost?

A 40%
B 50%
C 65%


Dan Perkins

Answer C

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