Danny Deadlock's take on the current markets...worth a read..cash is king...ensure the companies u invest in have some $$$ in the till or can at least still raise it in this environment...
$3 Trillion in Losses ??!!
This is one of the tougher environments we've faced for smallcap and microcap stocks in a long time. Following the collapse of techs in 2000, we watched the likes of Nortel reduced to penny stock status from values near $100 a year earlier. Now we've watched Bear Stearnes (BSC), a company around since the 1920's and with 14,000 employees, reduced to rubble. A year ago BSC traded at $150 and last week hit $3. While most joke about small and microcap stocks and their valuations, no one was laughing when the Feds and JP Morgan valued BSC at just over $200 million.
What started out as a $200 Billion problem in the sub- prime sector of the mortgage market, is now estimated by some mainstream analysts to be in the range of $1 to $3 Trillion ! The latter estimates assume that with growing unemployment and falling house prices, the mortgage problem spills out from sub-prime into what was previously considered to be less risky, prime lending (in addition to surfacing problems in commercial real estate and associated loans).
Slow Torture on Equities
Even when halted on good news, most stocks are seeing a very brief rally and then a sell off. Shareholders are basically waiting for the liquidity of good news to free up the cash - under most any circumstances. I'm even seeing this on highly liquid Nasdaq stocks that get good news or analyst upgrades - the situation is obviously much worse for the little guys.
This environment is making it very difficult to speculate on. For the time being, our focus will remain on companies with strong cash positions and preferably, grossly discounted to a strong asset or reserve base.
Our paid Streetsignal service is tracking almost 350 stocks from the newsletters and brokerages and we're seeing the same lack of interest across the board. Our strategy there is to avoid sitting on dead money until we see strength on a technical (T/A) basis.
Its a tough situation but the smallcaps and microcaps are doing no worse when you compare them to what has happened with many mid and large caps tied to financial services. When a company like Bear Stearnes loses 40% of its value in one morning, you can imagine the financial and psychological impact it has on pension funds and employee portfolios - its devastating.
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Direction For 2008
In a nutshell.... we'll maintain a very heavy weighting to the resource sector as commodities are one of the only bright spots in this mess. Demand for metals and minerals from Asia will continue strong and we're already seeing a flight to safety through gold. Speculations tied to resource exploration and development will remain our focus for the remainder of 2008 as they provide excellent leverage (although volatile) to record high commodity prices.
Check the exposure you have in pension accounts to anything tied to the financial services industry. Don't just assume that because this is a U.S. problem, we will be immune from it in Canada. Expect to see tightening credit policies across the board. Loose credit fueled the real estate boom, and tight credit will slow it down dramatically. Going forward you DO NOT want to follow companies with high debt - cash is king and strong balance sheets will become a critical criteria to any investment or speculation.
