Yesterday, the NASDAQ broke through its 200 day moving average. Other indices are falling and Moody's now predicts that another major hedge fund will collapse in this environment.
A Financial Times headline runs, "Funding fears hit financial shares". This bears out the view we have expressed: The Fed's liquidity injection is not reaching the people that most need it — the consumer and smaller companies — the lifeblood of our economic growth.
Financial Intelligence Report first warned you about the coming liquidity crunch in March of this year (We urge you to go here now to learn how to guard your portfolio against the current liquidity crisis, and for additional opportunities on how you can profit in spite of a stock market crash.
Banks and many major corporations are awash with cash. It is consumers who are illiquid and likely to remain so, unless our Fed drops rates.
[Editor's Note:Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.]
With our consumers illiquid, our economy is in for a serious contraction - a contraction that is likely to be reflected in our stock markets.
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It is for this reason that we feel the Fed should lower rates, not to rescue the gamblers, but to save our economy and our financial system, in the interests of us all.
In other words, we believe that, in the short-term, the survival of our financial markets is more serious than curbing "inflationary pressures".
We believe that, in this respect, our Fed is asleep at the switch.
Worse still, we note that the capacity utilization figure was up, indicating a possible upward inflationary pressure. This may make the Fed still more afraid to lower rates. If so, it risks driving a recession into a depression — the very worst of all worlds.
The FT has a cover story that says, "The European Commission is to investigate credit rating agencies over their [slow] response to the subprime mortgage crisis." This is a crisis of which we have warned for a year or more. It indicates that our Fed is not alone in being asleep at the switch.
Now, the Wall Street Journal (WSJ) has a lead item titled, "Paulson Expects Markets to Slow, Not Stall, Growth. That means that, at long last, our government is very worried at the risks of a market crash and must have their so-called "Plunge Protection Team" working overtime. See MoneyNews.com's Street Talk section for more on the Plunge Protection Team.
The WSJ also reports the increased earnings of Nestle, Heinz, and Sara Lee. But they are all food companies. As we have long said, there is an increasing worldwide demand for food and agricultural commodities.
Investors could consider investing in an exchange traded fund (ETF), such as PowerShares DB Agriculture Fund (DBA) that invests in the agricultural sector.
Go here now to get Financial Intelligence Report's top five commodities that are set to skyrocket in the next phase of the commodity bull market - and the six investments that you should buy now to capture potentially huge profits.
[Editor's Note:Sir John Templeton first warned of market, housing crash – Read More Here]
There is also an increasing demand for cash. In some sectors these demands border upon panic.
In the rush for cash, other assets get sold, including gold and the shares of great companies. Indeed, even companies with high overseas earnings may be sold into a strong market sector.
What should our readers do?
First, don't panic. Things normally occur in steps, not straight lines. The Dow, after an intraday plunge of 300-plus points, closed down just 15 points today.
Clearly, the recent selling spree has created a technical "oversold" situation, where sellers become exhausted. There could be a bounce back in the days ahead.
Second, those calling this a healthy "correction" are sadly wrong. We feel that we are going to experience a very serious contraction in our economy.
Under normal conditions, such a contraction would be reflected in stock prices. In today's liquidity mismatch and credit squeeze, it could be reflected in a market crash.
Thirdly, we feel that even good companies with fine overseas earnings will be dragged down in a general market collapse, particularly a collapse founded upon panic. This will create great buying opportunities — but at a later date.
The same goes for residential real estate.
As we have long said, our readers should accumulate cash. People, with cash, may be tempted by the relatively higher yields of some money market funds.
In today's liquidity crunch, some money funds are suspect.
Unlike banks, money funds are NOT insured by the FDIC.
Furthermore, money funds do not invest exclusively in the money markets. To enhance yield, some invest in commercial paper and other risk assets.
Today, the WSJ reported that an affiliate of KKR, "sought to delay repayment of $5 billion in short-term debt held by 15 money market funds…"
We feel our readers should look at 90-day Treasury bills as a relatively secure alternative for their cash. There are also foreign currencies CDs, which can give you some extra yield and protection from a falling dollar.
As we believe, our Fed might well be forced to lower rates (possibly initially at the discount window), we feel that bonds may experience a temporary uplift.
The iShares Lehman 1-3 Year Treasury Bond Fund (SHY) is an ETF that holds 1 to 3-month Treasuries. This offers credit protection and a little upside potential in the event the Fed cuts rates.
But we urge our readers to invest only in Treasuries and beware that delay may allow an anticipated rate cut to become "priced-in', offering little upside.
We believe that only the very bold will stay in ordinary shares and higher yielding bonds, including municipal bonds that are not insured.
Those who remain long of stock may think of hedging their positions by entering stop-loss orders; writing covered calls; buying put options and ETFs that are short the market.
Examples of these "market short" ETFs are: SDS (S&P 500); QID (NASDAQ); and TWM (Russell 2000).
On the subject of ETFs, my colleague David Frazier is launching an ETF Strategy letter, that we feel should become of increasing value to our readers. We'll give you more details in the coming month.
As we said above, gold is likely to fall in the short-term, as cash short investors sell gold to cover margin calls etc.
Should the present crisis worsen, if the Fed fails to react by cutting rates, there will come a time of real panic.
That would be the time to start switching cash into gold.
In this troubled world, we feel the shares of North American gold companies (such as Gold Corp (GG) and Kinross (KGC) offer some of the "political safety", possibly valuable to our readers. Another good bet is the streetTRACKS Gold Trust (GLD), an ETF that holds actual gold bullion.
For more information on ETFs, including our latest recommendations, go here now. You'll get step-by-step instructions on how to protect your portfolio — and even profit — in the event of a recession.
I was a cowboy for a short time in Wyoming, and I say, "Ride 'em cowboy, but take care to hold onto your hat!" In the months ahead, think more of return "of" capital than of return "on" capital.
Editor's note:
Sir John Templeton first warned of market, housing crash – Read More Here
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.
Buffett: The best book ever written on investing.
