Buy Stocks Now: It's a One-Way Bet
By Dr. Steve Sjuggerud
March 25, 2008
Last week, I told subscribers to my True Wealth newsletter, "Now may be the least risky time to buy stocks in more than a decade."
Those are all strong words, I know, and I could end up eating them.
So why do I feel so strongly? Let me explain...
Last Sunday, the tide turned. The boys in Washington finally got scared enough about the housing crisis and credit crunch that they did something about it. The Fed, the White House, and the Treasury... they all got together and built an impenetrable backstop for us. In fact, they overdid it.
This is quite foolish of them, in a way... as it creates a one-way opportunity for us as investors. Government overreactions have always created the biggest moneymaking opportunities. So while they're giving this opportunity to us, we need to take it, before everyone else figures it out!
The very best time to make money in financial assets is when you're coming out of a panic. Stocks are cheap, and people are scared. The last time we were coming out of a panic was in 2003, when we entered Iraq.
In 2003, I wrote about panics in True Wealth. Back then, I described a study by Charles Kindleberger looking at every financial mania and subsequent crisis. Kindleberger said we need a government savior... with a catch:
Kindleberger said the Fed should "always leave it uncertain whether rescue will arrive in time or at all, so as to instill caution in other speculators, banks, cities, and countries... A lender of last resort should exist, but its presence should be doubted."
Earlier this month, the government tried to play it tough... It tried to do what Kindleberger said and make the markets doubt the presence of a lender of last resort. Specifically, on March 6, a Treasury spokeswoman said rumors were "absolutely not true" that the U.S. government would offer backing to troubled government-created mortgage lenders Fannie Mae and Freddie Mac.
After that (insane!) statement from the Treasury, all bets were off. I sent out a special note to subscribers saying: "This is unbelievable. If government-sponsored Fannie Mae and Freddie Mac go belly-up, that's it for our virtual banks. It's a real disaster scenario for the U.S. mortgage market. I don't expect disaster. But I can't know the future. So I follow my trailing stops..."
In just two weeks, everything changed...
Last week, the Fed blew its cover. There is no doubt. It is now certain that rescue will come. The collapse of Bear Stearns was the turning point... the moment for the government authorities to step up. Bear Stearns, an 85-year-old Wall Street institution, went under, and the problems could have spread to others. That scared the Fed, the Treasury, and the White House enough that they showed their hands.
So on March 6, the Treasury explicitly told us the U.S. government would not back Fannie Mae and Freddie Mac. Now we hear the government has given Fannie and Freddie the ability to spend an additional $200 billion, so they can buy $2 trillion worth of mortgages this year. That's a lot of buying power... that's 10 million homes at an average price of $200,000 per home.
It's a complete about-face... The government tells us one thing on March 6. And then, it tells us exactly the opposite a few days later.
The government was trying to play it cool... But last week, various arms of government showed their hands. They showed that they'll ultimately "protect" the status quo with all it takes. It's a shame Bear Stearns and others had to be the sacrificial lambs, but now we know.
So while it feels risky out there now, I feel quite good... as I said at the beginning, I feel that now may be the least risky time to buy stocks in more than a decade. Now is a moment to be willing to step up and buy when everyone else is scared.
While I can end up eating those words, I know that we can't make big money if we aren't willing to risk losing a little. And right now, the government is working hard to make this a one-way bet for us.
Good investing,
Steve
P.S. Later this week, I'll share one of three stock sectors I recommended for my paid subscribers. Don't miss it!
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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