August 9, 2007 – Back in March, we had U.S. Secretary of Treasury Hank Paulson telling investors not to worry because the economy was “fine” as he put it. Then just the other day President Bush issued statements saying that the economy was fine again. However, don’t say that I didn’t warn you against such foolish talk and I’ll warn you again here. This current volatility is just a small speck on the screen compared to what is eventually coming. What is happening in today’s global markets is not the Peak Investment Crisis I speak of on my homepage, but it’s coming. This current fallout are just the cracks that serve as warning signs of a greater danger. Now I can’t be certain if this Peak Investment Crisis will start in several months or will even take a year or two to gain real momentum, but I do know two things: (1) it is on its way; and (2) if your portfolio is positioned traditionally with diversification and asset allocation strategies, then you are equipped to lose great value when the Peak Investment Crisis eventually happens. Just read my entry on June 27th when I wrote “Don’t let the strength of the U.S. markets in the first half of 2007 fool you.” I couldn’t possibly have been more explicit that investors in the U.S. markets needed to purchase some protection against an eventual downturn. And when Hank Paulson says the economy is fine, I put as much faith in that comment as I would in a 7-year-old’s economic analysis, not because I don’t believe he knows what’s going on with the economy, but because I don’t believe he is being forthright in his comments.
Just read about the actions of Paulson’s former firm, Goldman Sachs, on this blog and you will read about ways that they have probably manipulated various market segments in the past for political reasons. At one point I discussed GM puts on this blog and they were profitable to a tune of about 35% if you sold out early on after I discussed them. However, shortly after my blog post, a star Goldman Sachs auto analyst upped his rating on the stock to “buy” and targeted the stock at $42 a share at a time when GM’s sales were crumbling and after a report was released that GM’s finance division could take a $1 billion hit for subprime mortgage woes to come. There was zero intelligent analysis and fact no financial outlook that merited a 45% increase in target price from Goldman Sachs’s targeted share price of $29 at the time to a $45 targeted share price. However, having the backing of a huge player like GS immediately sent the stock soaring to $38 a share as all the fools that blindlessly follow investment firm’s ratings bought into the stock. If I was the CEO of a firm that had an analyst up his rating on a stock like GM based upon zero logic and no existence of an even slightly positive financial outlook, I would have fired the analyst on the spot. Of course, there were probably political reasons behind this upgrade of GM that will never be disclosed to the public, but one can easily deduce what those reasons were as there used to be a saying “As GM goes, so goes the U.S. economy”. In any event, the GS Analyst’s upgrade of GM stock was a blatant attempt to manipulate the price of the stock against all odds, and it succeeded in its objective. And that’s why I won’t place faith in much of anything Hank Paulson says.
But back to the topic at hand. I wrote about the safe “way” to purchase insurance here on this blog and our investment newsletter subscribers knew to watch for bounces higher before buying some protective puts as well if they chose to engage in such actions. That’s why it was so foolish of other investment newsletter editors to send out tons of emails on the days when the DOW experiences strong triple-digit gains that were mere bounces from oversold conditions and urge subscribers to buy again. But then again, they are perpetual bulls for sales reasons, and if you search my archived blogs for my thoughts about “perpetual bulls” you’ll know that you should never listen to them. And if these highly volatile markets turn up again, I would use any truly significant movements higher to purchase more insurance on the downside, whether through adding to hopefully already established positions of inverse funds or establishing puts as there is still a strong possibility that U.S. markets could break through the lows established at the end of July and head considerably lower before this correction is through.
[tags]politics and stocks, peak investment crisis[/tags]