Profit From Panic
Tuesday, March 18, 2008 | Teeka TiwariRating:
That loud popping noise you hear is Wall Street's collective brain stem snapping. WOW! We are seeing some true madness develop. For those of you that have been living on the moon for the last couple of days, let me bring you up to speed. Over the weekend, Bear Stearns (Symbol: BSC), one of the country's largest and most prestigious brokerage firms, essentially went belly up.Via a JP Morgan buyout, engineered by the Federal Reserve (and $30 billion in loan guarantees), the Fed has attempted to avert a full scale global panic. Let me be clear here - the issue is not one of bad trading (although some of that did occur), the issue is confidence!
This game only works if everybody believes in it. It’s like paper money: it only has worth because we all agree it has worth. In actuality, it's just little bits of green paper backed by NOTHING! (That was my nod to the fiat currency equals death contingent of readers. Yes, you are right, but nobody cares!)
This is almost humorous, because all we are seeing right now is supposedly intelligent and grown up men and women losing their minds. Wall Street has lost perspective and lost faith in itself. The good news is that these types of events are short term in nature and lead to excellent buying opportunities.
When fear is so palpable that you can cut it with a knife, you are pretty close to an inflection point. Now, we probably still have some more churn to go here, but sentiment is so utterly bleak right now that I am compelled to go the opposite way.
Now is the time to ask yourself, "What do you believe?"
Do you really think that the entire global banking system is going to cease to exist, and that worldwide anarchy is about to descend upon us? If you believe that I can’t help you! If, however, you believe that the sun will shine again, then you need to ask yourself “How do I make this panic work for me?”
The implosion of Bear Stearns is a prime example of how even a large and well recognized company can get head shot. That is why during extreme periods of uncertainty, ETFs (Exchange Traded Funds) MAKE SO MUCH SENSE! ETFs are the vehicle of choice for savvy investors that want to take sector bets without all the risk of individual stock ownership. (An ETF is similar to a mutual fund, except it trades like a stock. It allows you to immediately buy or sell an entire sector in one security without the pesky fees and wait times of a mutual fund.)
Sure, you give up some side upside, but don’t kid yourself. After a beat up market like this one, some ETFs can run 30% to 40% higher once sentiment begins to change. If you are a long term player, I don’t know how you can’t be looking at the finance ETFs right now. For patient buyers, we are seeing an opportunity to get long at a business cycle low.
Who knows if this is the exact bottom... it may or may not be. Perfect timing is a myth. You will never get the exact bottom or top of any market move. What you can do, however, is get excellent prices as viewed through the lens of time. Six months from now, 1 year from now, these prices will look cheap, cheap, cheap!
There are many finance related ETFs available. Some are the Dow Jones U.S. Financial Sector Index Fund (IYF), the Financial Select Sector SPDR (XLF), and the Regional Bank HOLDRS (RKH). These are just a few, so be sure to look at more than just these three. Yahoo has an excellent ETF section, and you can always do a Google search on “Finance ETF”.
I’ll also say again that you’ve got to be taking a close look at the oil service guys. If you’ve got the stomach for the volatility, this sector still represents excellent long term upside potential. The other thing you need to be doing right now is keeping an eye out for stocks and sectors that are bucking the trend. One such sector is the agriculture/food sector. You must get some exposure in these areas pronto!
Food prices are going to sky rocket over the next several years, and you will begin to see gobs of money flow into this space. A quick Google search using the phrase “agricultural ETF” will yield a “bountiful harvest” (corny I know!) of potential investment ideas.
The point I want to stress to you today is that I want you to be mentally flexible. So many of us are conditioned to act a certain way when certain events take place. If we can move past our programming and think for ourselves rationally, we can separate from the pack and make decisions based on facts, not fear, and that leads to making money, lots of it!
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
