The Final Numbers - The Failout

NEWS: The futures were so bright I had to wear shades! But by late morning the shades were on the floor. The Dow futures rose over 100 points this morning in anticipation of a big rises in Fannie and Freddie after the government announced a bailout plan on Sunday. The early triple-digit gains did not hold and the Dow finished the day off 45 points or 0.4%. The S&P 500 fared even worse, losing 11 points of 0.9%. The Nasdaq topped that with a drop of 1.2% or 26 points. And even worse yet was the Russell 2000, down 1.6%.

THE BOTTOMLINE: The government’s attempted “bailout” of Fannie and Freddie did not go as well as planned. After sending shares of the two troubled mortgage companies higher by over 20% this morning, the stocks both closed down at least 5%. The SPDR Financial ETF (XLF) closed at a new low, down 5.5% on the session. Getting hit even harder on the news of the largest collapse of a bank ever (IMB) was the KBW Bank Index, falling 8.5%. The index closed at the lowest level since 1996 and IMB closed at 12 cents, down 57%.

The question most investors and bankers are asking has to do with the safety of their deposits at banks. Just an FYI, the FDIC generally insures up to $100,000 of your cash deposits and some banks have more insurance on top of the that. BUT, unless you are completely paranoid, you should not have to worry about a run on distressed banks. The media is running with the headline grabbing story and as usual the naive investors are panicking.

McCALL’S CALL - FINE TUNE VS.PANIC

NEWS: Over the last two weeks I have been fine-tuning some of our Portfolio Management clients’ portfolios as we locked in some winners and sold off some losers.

THE BOTTOMLINE: Many investors mistake fine-tune selling after the market falls with panic selling. The major difference is that the investments we are selling are based on the future outlook of the individual stock or ETF. Panic selling on the other hand is purely emotional and related to what has taken place in the past and is not focused on the future. Whether the stock is up 10% or down 10% today is truly irrelevant. I know this may sound opposite of what I often preach, but the fact is, once you are past your stop-loss price the strategy turns to the future of the stock/ETF.

For example, ABC stock could be down 10% and sitting on long-term support and in a sector I feel has a great potential to beat the market in the coming six months. XYZ stock is up 10% and is well above support, but the dynamics of its sector has been changed and I do not feel it is a good place to put money for the remainder of 2008. So instead of simply selling the loser versus the winner, the strategy will be to sell the investment that has the worst reward-to-risk scenario at the present time.

Posted in Categories: Contributor, External Research, Stocks, USA.

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