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Financial Reckoning Day Arrives

Financial Reckoning Day Arrives

October 10, 2008

By Ron DeLegge, Editor


SAN DIEGO ( - Right now the herd mentality rules.


In 1999 they were buying Internet stocks. When that got old, roughly around 2003, they started buying real estate. And today, now that theyíve lost almost everything they own, theyíre selling stocks. Even though they canít see it, theyíre all imitating each other.


And what can be said of Americaís lovely bankers?  


Battered banks are hoarding cash and they donít want to lend it to other banks or to anyone else. Thatís no way to run a business! Share!


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As weíve discovered over the past year or so, banks and other lending institutions (AMEX: KBE) werenít a very intelligent bunch when things were going good and now that the party is over, they look even dumber. Thanks to their loose lending standards and other financial foolishness, their prized banking system is shot.


Paper or Plastic?

America, whatís left of it, will become a cash society. Houses, cars, televisions, and other goods will have to be acquired with paper not plastic. In other words, people will only be able to buy things they can actually afford. Shouldnít it have been that way from the start? Anyway, this will have a profound impact on consumer discretionary companies. (AMEX: XLY) The go-go days of consumerism are over.


Every dynasty has a beginning and an end. And the dynasty of phantom money (credit) is just about over. It was fun while it lasted.


As a leading indicator, the stock market is signaling the financial pain that is yet to come in the U.S. economy and elsewhere. Itís already vomited out companies that donít deserve to exist. (See American International Group (NYSE: AIG), Lehman Brothers, Washington Mutual, etc.) This process is quite similar to your bodyís natural reaction to expel things that are making it sick. Before the body can heal itself, it first needs to eliminate the poison.


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The Stock Marketís Sick Body

Donít be scared by dramatic declines in the Dow Jones Industrial Average (AMEX: DIA), the S&P 500 (AMEX: SPY), international stocks (NYSEArca: EFA) or any other major stock market index. More financial poison still needs to be expelled from its bodily system. Itís a natural reaction that had to happen sooner or later. Once itís over, the stock market will regain its health. Just how long this process will take, nobody knows.


If you think the stock market has failed you, what can be said of Wall Streetís analysts? Not one of them had the foresight (or guts) to warn in advance the failure of Americaís once leading institutions. The least they could have done is simply said ďsell.Ē Who knows, maybe they were too busy counting their money.


The next wave of attention is already being focused on a new old set of ailing companies; General Motors (NYSE: GM) and Ford Motors (NYSE: F). I suppose the question isnít so much about if they will survive, but how can they possibly survive. All of the home equity that was used to finance automobile and SUV purchases is gone. The consumer discretionary industry sector (NYSEArca: IYK) is likely to have more pain. It might not be bad to take a look at funds that move in the opposite direction of this sector. See the ProShares UltraShort Consumer Goods ETF (AMEX: SZK).


History Repeats Itself

People that save and invest will always be better off than those that donít. No matter what happens in the stock market or with the U.S. economy, make it your resolve to be one of these people.


All of the individuals cashing out their 401(k) retirement plans today are going to be sorry tomorrow. Instead of selling everything, they should have had enough sense to simply adjust their asset mix. If the television is too loud, you donít throw it out the window Ė you lower the volume!


And speaking of 401(k) plans, is there any doubt major reform needs to happen? Most 401(k) plans offer lousy investment choices that lack diversified exposure to major asset classes like commodities (NYSEArca: GSG), real estate (NYSEArca: VNQ) and gold (NYSEArca: GLD). Exposure to stocks, bonds, and cash isnít giving 401(k) investors all the diversification they need during these turbulent times.

Companies and people that spend and consume beyond their means by overleveraging, will wither. Whether we like it or not, it inevitably happens. It has to.


And itís nothing really new or different.


Itís always been this way.

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