Ben Bernanke, Rock Star?

We've heard it all before-- Too Big To Fail. And honestly, some of these institutions, like Freddie Mac and Fannie Mae, are too big to fail. The problem we face is what to do with them... privatize them, bail them out, put them into conservatorship? How do we prevent even more moral hazard in the financials? There are no do-overs here. And the banks are facing their own pressures.

Two weeks ago, Bernanke and the Fed did nothing, and in so doing, they sent a message to the market that was implicitly "we're too worried about the banks and financial system to tackle inflation". So instead of raising rates by .25% and creating a stock market rally based on inflation fighting, and sending an implicit message that the banks will be fine, the market has lost 1000 points in 2 weeks. Had Bernanke and the Fed raised rates slightly, the entire psychological composition of the market would have changed: we'd be fighting inflation, people would invest in the market, financials would be able to raise capital from investors, liquidity would increase... instead, we are where we are.

Nice going Bernanke-- you're a rock star.

We're In Bear Territory-- Don't Become Bear Meat

The last 6 months has turned by definition into a Bear Market, where we've seen more than a 20% drop in stock market prices over the last 6 months. I have received a few calls asking if we should sell everything. This is where I earn my keep to prevent making a financially disastrous decision, since wholesale selling here is more than likely 5-10% away from the bottom. The question of selling everything and attempting to time the market is folly, with numerous empirical studies highlighting this type of behavior; when do you sell? when do you get back in? Typically small investors sell at the bottom, wait for the market to recover 10%, then they buy back in; in other words, they miss a 10% pop in prices, then they buy into the top of a bear market rally, then sell again at the bottom of that failed rally. This could happen several times, to the point that what was a 20% loss ends up being a 30% or 40% loss due to making emotional decisions.

This is not the market price level to sell into, this is the market price level to buy into. So investors, particularly retired investors, whose portfolios undoubtedly contain some allocation in bonds, this is where we take some of that bond allocation and buy into stock prices when they're low. That is, sell bonds to someone who desperately wants to buy your bonds from you, and buy stocks from someone who desperately wants to sell them to you. This is the level-headed approach, and also the approach that happens to help even out investment returns over the long run. In this market, let the other guys make the mistakes, and capitalize on their mistakes.