The Two-Headed Dog with Six Faces

For those of you who jumped back into the market today and got burnt — AGAIN, this might help you to decide when to enter (and you should) again into dreaded abyss.

 

Consider that this financial crisis has two phases with three stages in each phase.

 

The First Phase (A) concerns the operating companies (corporations) and started in late 1Q 2007:

1) Sales begin to decline because of recession mindset of consumers

2) Cost cutting and layoffs begin to occur to preserve profit and their precious earnings per share

3) Corporation seek additional credit/loans from banks/hedge funds to tide them over through this “temporary” slowdown

 

The Second Phase (B) concerns the financial companies and this started around 2Q this year. We are currently in the second stage:

1) Credit freezing up and banks refusing to lend

2) Business owners not getting credit/loans to meet operating needs so they begin to draw down on existing lines of credit

3) Businesses begin to default on existing lines of credit and loans

 

Think of this as a downward spiral leading to the bottom of the market. Once corporations begin to default in massive numbers, the U.S. Govt will have to intervene again with more bail outs and more shotgun marriages. More company failures and bankruptcies should also be a key component of this stage. The Govt will be more apt to let private corporations fall than they were banks which held taxpayer(and voter) money.

 

Now back to The Market. If you have $1m+ to risk and are looking to profit short-term from the volatility, then you should keep rolling the dice and hope you don’t crap out. For those that pulled out because of fear and want to ensure a safe return to the market, wait until the corporations begin defaulting on the credit lines and loans (without any way to refinance or repackage them). Only strong companies with clean balance sheets will be able to survive such a climate and are worthy of your investment. This defaulting activity will bring the entire market down but as long as you do your research, good companies will rise again. Even Berkshire Hathaway will not be immune to this downturn because a majority of the companies that it owns operate in the consumer sector. What you will not see from Buffett’s companies is defaulting or failing en masse. Just something to consider.

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