Money Matters airs this Thursday February 4th, 2016 at noon Pacific Standard Time

Markets got you down and wondering what to do?

Feel Free to call me or email me with your questions about this market.

(530) 559-1214 Email: mcuniberti@cambridgesecure.com

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Money Matters airs this Thursday at noon , PST on KVMR FM

" Are the markets stabilizing"

With the markets now again in turmoil and Washington acknowledging the recovery is starting to look like  a no show, investors are left wondering if we are in for another meltdown or just a temporary soft patch.

Problems stemming from the ongoing European debt crisis and rumors of continuing banking concerns worldwide combine with our own slowing economy, putting a dampener on investor enthusiasm.

The latest consumer confidence numbers are dismal and a falling Dow Jones Industrial average attest to new stresses in financial markets.

7 years after the economies of the world nearly imploded and with trillions of bailout now gone, the crisis that many thought was behind us may be once again rearing its ugly head.

The reason we are seeing new volatility in both the banking sector and the markets is because the underlying problem was most likely misunderstood by monetary authorities around the globe.

You need look no farther for proof of that in a statement by Luc Coene,  Governor of Belgium's central bank who told French-language daily newspaper La Libre Belgique "The chief problem in Europe is that of liquidity,"

Many analysts think this is not a liquidity problem but a solvency problem.

Liquidity can be described as you asking me for the 10 bucks I owe you and I tell you I have the 10 bucks but don’t have it on me. I have a liquidity problem.  I have the money but it’s just not available to me right now. In this case, a loan will solve the problem.  I can pay the loan back when I retrieve my 10 bucks.
A solvency problem is where  I owe you the 10 bucks and not only do I not have it on me, I don’t have it at anywhere. I don’t have a liquidity problem because instead I am not solvent

Trillions of dollars in home loans (essentially IOU’s) were sliced, diced, packaged up into complicated asset offerings and sold worldwide. Eventually debt markets everywhere were saturated with this stuff

When the housing market imploded, many of these IOU’s became worthless.

Instead of liquidating these loans and allowing those holding the debt to swallow the losses, central banks made more loans to backstop the original ones, essentially borrowing from Peter to pay Paul.

The debt never really went away. The amount of liquidity in the system was never the issue. It was the actual solvency of those loans.

By allowing all those loans to “survive” sort of speak, financial institutions, central banks and entire countries holding this stuff are still insolvent according to some and no amount of money conjured up to fill their operating balance sheets will make that disappear.

The fact remains all those homeowners stopped paying and tossing money at the system every month may solve a temporary cash flow problems but much like a housewife gone crazy with credit card debt, you can pay off this month’s bills but next month you have the same problem.

Couple that with higher government deficits the amount of debt and promises that now exist in markets everywhere are soaking up any and all monies tossed at them.

Like the proverbial hungry alligator whose appetite can never be satiated, unless we kill off the debt beast altogether, it will continue to reappear in many forms.

But since the food it eats is just more acquired debt, the alligator just gets bigger with every feeding because of the interest on that debt has to be paid and gets added the bill.

This is why the amounts we hear about to bailout Greece, Spain, Portugal, Freddie Mac, Fannie Mae, the FHA, and who knows who else is getting larger with each news headline.

Recognizing the problem goes back to basic logic: You can’t solve a debt problem by amassing more debt. Each time you cover each feeding with another “round” of bailouts, loans, stimulus or whatever you call it, it’s just more debt and deficit figures from Washington and other central banks seems to confirm this.

The solution lies in repudiating the debt, either thru default or discount.

Because the debt is held by the world’s most powerful institutions and even central banks, the “death’ of these massive debts will most likely cause tremendous upheaval and financial convulsions in markets worldwide and this is what the central bankers of the world are desperately trying to avoid.

The first step in solving a problem is recognizing

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Many investors took major losses on their stock portfolios in 2008 and 2009 and most would attribute those losses to plunging stock prices. Beside the obvious stock price plunge, there are basic strategies that may have mitigated some of those losses yet few investors utilize them. One of the most important aspects of investing is not to lose money, or at least minimize the possibility of loss, for if an investor is losing money, he obviously isn’t making any. An analogy would be you can’t go forwards if you’re going backwards.

A critical strategy in not losing money is having an exit point on your stocks yet few advisors or investors have one. An exit point is a predetermined level or price that you would sell your stocks. The common mindset that prevents investors from limiting losses by having a predetermined sell point works like this. Let’s assume the market starts to fall and an investor is looking at a 5 % loss in his portfolio. The investor or advisor handling the portfolio thinks “we’re only down 5 %, that’s not anything to worry about”.

If the portfolio then drops 10%, the same excuse is used to continue to hold. Now it drops 15%, then 20 % then 25 %. The same excuse of “it’s not down far enough” is continued. If the market continues it’s decent, somewhere along the drop, usually between 25 or 30 %, the investor or advisor then suddenly switches his mindset from “you’re not down far enough” to “you’re down too far now, you can’t sell here”.

What happened is the change in thought process’s never allowed for a sell strategy.

In essence, there never was an exit point, a point where the investors says “I’m down

24 % or 25 % or whatever the number is, so “I’m out”.

Consider this. Investors are lucky the market stopped where it did last year, for if it hadn’t, the mindset of “you’re down to far now to sell” would may have convinced investors and most advisors to ride the markets down to wherever the market stopped.

Not having an exit really means the investor never had a chance. Unlike leaving a casino after you’ve lost a certain amount, in stocks, most investors don’t practice the same self control they would sitting at a slot machine. Not having an exit point is like never leaving a house that’s on fire. You might not leave for a small fire in your oven, but you sure would get out if the kitchen was engulfed.

That the investor flops from “you’re not down far enough” to “you’re down to far to sell now” never allows for “cut the loss and run”. There never was a fire escape or a point at which the investor, much like playing a losing slot machine, gets up and leaves the casino. This common fault among investors leaves them open to massive losses and years of accumulated profits vanishing in one severe crash.

Interestingly enough, there is a point some investors will sell their stocks, and it’s a well known point to market historians. When the average investor is down massively, the investor (or their significant other) suddenly panics and says “we’ve got to get out with something!” and liquidates at the very bottom along with millions of other investors usually resulting in what it called a “final capitulation”.

The markets experience one final brutal sell off. This “selling at the bottom” is classic among small time “retail” investors and is the reason why years of gains seem to vanish in market crashes. Ironically, at the time most investors reach this capitulation point that is usually the time the “smart” starts buying.

Establishing a “sell point” either by stock price or percentage loss might be a strategy investors should consider. Much like a fire escape, know when its time to get out before the whole thing goes down in flames. If you need help establishing a strategy in your investing, feel free to contact me.