Current Oscar Lama Issues

Jay Wagner

The current economy is in bad shape – at least that’s what all of the pundits tell us. The conventional wisdom in times like these is to put stop loss orders on everything, put everything you can into blue chips, or settle for the safe, low returns of Treasury securities.

I’m here to tell you that the conventional wisdom is foolish.

In the first place, the conventional wisdom is contradictory. You can’t have automatic trades to comply with stop loss orders going on constantly and maintain major holdings in blue chips. Even the blue chips – maybe especially the blue chips – are subject to market volatility. When the economy is bad, inflation becomes a major concern, and the market starts requiring a higher return on investment. At the same time, the bad economy drives sales downward, reducing corporate incomes and, by extension, return on stockholders’ investment. The result is market dissonance that exacerbates existing market volatility. The general trend is for prices to go down, and the easier a security is to trade the more precipitous its price decline tends to be. This is simply a function of supply and demand: more people want out than in, so supply exceeds demand and prices drop.

Supply and demand also accounts for what happens with bonds, notes, and commercial paper. In a difficult economy, fixed income securities are less appealing because of inflation concerns. Here again, people trying to get out of fixed income securities outnumber those trying to get in, so prices go down and both current yield and yield to maturity go up. At the same time, new debt issues of any kind are almost impossible to sell, and, with the rest of the credit market similarly tightened, companies are unable to borrow necessary cash at reasonable rates, forcing them to offer their debt placements at rather deep discounts. The bottom line is, they must raise cash to weather the economic storm, and they will pay handsomely to get it.

You’re seeing it today on every news channel: the prices of securities are declining virtually across the board. Your broker may be telling you to cover everything with stop loss orders and trade, trade, trade. That may be a case of your broker subscribing to the conventional foolishness, or it may be a case of your broker trying to protect his income: after all, commissions come from trades, and your broker lives on commissions. The question I have to ask is why would you want to sell now? It makes about as much sense as buying merchandise at Nieman Marcus to resell at Wal Mart. This is not, I repeat not, the time to sell. The economy is on an express elevator to the bargain basement, to be sure, but history tells us that when it comes to the stock market, what goes down must come up. Knowing that, this is the time to get in on the bargains. That “next Microsoft” that everyone is looking for might be trading for far less than its legitimate value right under your nose right now!

Growing up in Kansas, I was acquainted with a man who had amassed vast holdings of farm and ranch land. He was an eighth grade dropout, and I often wondered how he came to be so wealthy, so I finally asked. “Son,” he said, “Most of my land was bought back during the dust bowl, when farmers and ranchers were selling off their land or bankers were foreclosing and then trying to get what cash they could from the deal. I was just a farmhand back then, but I had a little money saved up, and when land dropped below twenty-five cents an acre I started buying. As the economy started to pick up, I used that land to borrow against and buy more land. By the time the drought was over, I owned almost ten sections [note: there are 640 acres in a section] and hadn’t spent $1,000 to get it.” At the time that we had that conversation (about 1972), his $1,000 investment made between 1930 and 1939 was worth over $3 million, an annualized return on investment of around 25%.

Do you have “a little money saved up” that could be used to pick up the bargains available in the current markets? My friend knew that the drought that caused the dust bowl wouldn’t last forever, and he made a fortune from other people’s panic. Investors are in a panic now, but if you’re smart their panic is your opportunity.

Investments to Avoid

In a struggling economy, investors tend to make the same mistakes over and over, and those mistakes take two forms: running for “safe harbor” and becoming extremely active traders in anything that is going up.

The safe harbor crowd always runs to one of two places, blue chip stocks and Treasury securities. As we have already discussed, blue chips are probably the roughest safe harbor you can go to, rather akin to anchoring in Galveston Bay during Hurricane Ike. Market volatility tends to have a more pronounced effect on blue chips: add the fact that blue chip companies like General Motors, General Electric, and AIG are all fighting for life right now and a run for the blue chips is borrowing trouble rather than escaping it.

Treasury issues are, without a doubt, safe. After all, if the Treasury defaults the money is meaningless anyway. The problem is, this is a “safe” harbor full of purchasing power pirates. The return on Treasury securities rarely keeps pace with inflation in an economic downturn, so while your safe harbor investment may be earning you a return in nominal dollar terms, in real dollar terms you’re losing purchasing power. It doesn’t do much good to earn 3% on your money if prices are going up an average of 6%.

Sadly, many investors who don’t run for safe harbor become speculators, moving money constantly into anything that is going up at the moment. Since most of the market is going down, this all too often drives them to the derivatives market, especially in today’s economy where oil futures have, at times, exceeded $140 per barrel. The problem is, if you’re short at $120 per barrel and the spot market on the settlement date is $140 per barrel, you’ll have to either lose money on an offsetting long position, sell your short at a loss, or have 1,000 barrels of crude setting around that you can part with. On the other hand, if you have a long position for $140 and the spot price is $120, you get to lose money going short or selling the long position at a loss, or you get to take delivery of 1,000 barrels of crude that you’ll lose $20,000 selling on the spot market if you can’t store it and wait.

Some investments, especially derivatives, will go into bubble mode early in an economic downturn, but don’t let that fool you into entering the bubble with them. As any kid who ever chewed bubble gum or blew soap bubbles can tell you, bubbles burst. If your money is in the bubble when it bursts, you can wave goodbye to it as it is scattered on the winds of economic caprice.

Investments to Make

Some companies and industries have proven themselves to be amazingly resilient. Like everything else, their securities are or soon will be selling at bargain basement prices, and if they appear to be struggling the discounts may be extra deep. Do your homework, make sure that they are positioned to bounce back, but if they are, buy while the price is low.

The current debacle started with a meltdown in the sub-prime mortgage market. The result is a large number of foreclosures, with lenders ending up holding real estate when they need cash. As a result, real estate prices are falling, so if you can, this is a good time to buy real estate or invest in companies that are investing in real estate. The prices will go back up, just as they did for my friend who invested in farm and ranch land during the dust bowl.

Many brokers and analysts have an innate fear of high yield (so called “junk”) bonds. Admittedly, some high yields have gone under and become no yields, but as a rule the returns have been in line with the risks, and sometimes a little higher. During an economic downturn, there tend to be two types of high yield bonds on the market: those with something behind them and those with nothing behind them. The former are usually issued by companies that want the capital to invest while the market is down, generally in either income real estate or leveraged buyouts. These tend to be pretty good bets for a sizeable profit in a relatively short period of time, and they offer your investment some diversification while providing at least partial collateral from the assets they invest your money into. The latter are usually issued by companies that are cash strapped and have credit problems, and they’re offering them to raise working capital: as a rule, they’re a bad investment and far more likely to default than the secured high yields.

The best bargains, however, may be in small cap (so called “penny”) stocks, initial public offerings (IPOs), and various kinds of notes, especially those backed with some kind of collateral. Some of these securities (especially the notes) can have some pretty creative terms, but if you understand the terms they can be a good, and often high yield, investment.

However, He Said . . .

While you’re doing all of this bargain basement buying, it doesn’t hurt to put a few safeguards into your portfolio. These can take several forms, as you’ll see.

After spending the first part of this article giving you all of the reasons to avoid the rush to blue chips and Treasury securities, I now need to backtrack just a bit. I’m not going into the famous politician’s gambit that “I was against it before I was for it.” I’m still adamantly opposed to loading your portfolio with volatile blue chips and low yield Treasuries, but having a portion of your portfolio in these securities isn’t a bad thing. The blue chips may recover a little more quickly than the market at large, and the Treasury issues will at least provide a good final position in the event of a major, long-term depression.

There are, of course, other ways to protect your portfolio. As you know, I’m against riding bubbles, especially in the derivatives markets. However, derivatives can be used to hedge your positions. Worried that a rise in interest rates will devalue that investment in mortgage notes? Just hedge the position with Treasury note or Treasury bond futures. For example, one long 10 year Treasury note contract can effectively insure one $100,000 10 year mortgage against excessive value loss due to rising interest rates. This doesn’t tie the two inextricably together, but as 10 years Treasury note rates rise toward the level of the long position, its value increases to cover the value lost by the mortgage note.

Another thing that can help your portfolio is investment grade bonds, especially if they can be converted to common stock. The conversion capability tends to buoy the price some, and the bond income can provide money to cover short-term losses in other areas or help your income weather the economic storm.

You Can Profit with Oscar Lama

The Role of Fear in This Faltering Economy

By: Danna Schneider

Our economy is definitely going through some “tough times”, as our President George Bush recently confirmed in a speech regarding the floundering economy of today.

A combination of factors have created a very volatile stock market, housing market, increasing inflation and cost of living, and a faltering job market, but one key component of a failing economy plays an intangible role in facilitating and perpetuating economic instability.

That component is human fear. We can’t help it, we’ve evolved with fear as one of our main emotions, and the media and our surroundings have only helped it along by declaring “the sky if falling” with it’s seemingly nonstop doomsday headlines.

Heck, you can’t read your email without seeing the headlines on the side declaring that we are headed for worse times before they get better, costs are skyrocketing, foreclosures are at an all time high, gas prices are astronomical, and basically that everything is working against us right now.

The sky looks very dim indeed if you tune in to the nightly news or happen to be bombarded with all this fearful journalism every day on the internet, which is an increasingly popular portal for getting the news. So, has the media played a part in our faltering economy, or is it really a combination of unfortunate factors, seemingly brought on by events beyond our control?

Well, most people feel the media is partly responsible for making things worse. Take the stock market for example. Fear is the stock market’s worst enemy. When consumer confidence in the economy is low and there are other headlines that are less than favorable in the financial, retail, and last but not least, housing sectors, the stock market suffers dramatic volatility.

In fact, one of the hardest hit in the subprime and credit fiasco, whom also was recently bailed out by the federal government and JP Morgan, another financial heavy, Bear Stearns, acknowledges that fear is it’s worst enemy. They insist that their financials are still intact, but rumors that were rampant about the company’s imminent collapse forced shares down to their lowest levels in almost eleven years.

Many financial institutions are experiencing nosedives in their stock prices, and have also slashed dividends to preserve working capital, a move that is said to create a domino effect in the banking industry where other banks follow suit. This only forces prices lower on stocks, and makes it harder for them, and consequently, the market, to recover.

Most financial analysts agree now that we are in a recession, but some are still reluctant to call that card, saying that a recession may still be averted, and that we are merely in an economic downturn. I for one, believe we are smack in the middle of a recession, and I believe that part of the reason for that is the fear that is being spread about the dire straits the US economy is in, and the sense of hopelessness conveyed by these doomsday headlines.

Fear perpetuates a sense of helplessness and “waiting it out”, as well as inspires investors to back their money out of stocks and other investments, and put them into cash accounts, which only puts us further into recession. For those that have iron stomachs, it’s actually a great time to be an investor, as there are some good, solid companies selling for well below their book values and their true worth right now.

That’s not to say there also aren’t a lot of stinkers too, but if you practice due diligence in researching their individual financials and balance sheets, you may be sitting pretty when this recession is over and the consumer confidence that is so key to a healthy economy has returned.

Fear and Oscar Lama Faltering Economy

How to Market in a Really Bad Economy

By Louis Bernstein

Eight marketing ideas to help your small business during a bad economy.

Even if your company is doing well during a down economy, you need to make plans for customers who may start cutting back. They key is to shift your marketing from image-oriented marketing to direct response, measurable advertising.

If your business is already feeling the effects of a weakening economy here are some strategies you can use to market in a bad economy.

1. Place your focus on more direct forms of revenues versus “image advertising.” It’s time to show good, measurable results. Coupon redemption programs and the use of promo codes can be very effective. When the economy is down everyone is looking for bargains. With coupons and promo codes you also get to track what’s working and what isn’t.

2. Learn more about your customers needs. Surveys don’t have to cost anything. If you have an email list, you can build a quick survey to send out using Survey Monkey. It’s free and easy. You can also put the survey on your web site and offer something free for people to take the survey. Since you may not be able to advertise everything during a bad economy, it’s smart to know where to put your money.

3. Call in favors from your vendors. You need to get the biggest bang for your buck. I’m not suggesting hitting up your vendors for such large discounts that it places an undue strain on them. However, get what you can while keeping your relationship good and making sure they stay in business to serve you throughout the downturn.

4. Not all customers are created equal. See who has purchased the most from you and make sure you stay close to them. As your best customers, they should be entitled to any perks you can afford.

5. Stress ROI. All of your campaigns need to convey how your customer will profit from your product. And you need to be as certain as possible that your advertising campaign will pay for itself. When you start a business you obviously need to watch your pennies. However, don’t abandon this practice as you grow your business.

6. Test. Test. Test. Segment your list and try different subject lines, headlines and sub heads. Try different offers. The key is to find the one combination that hits the sweet spot and use that one. This point brings us back to the importance of measuring your results. With limited funds when starting a business you need to know which message gets you the best results.

7. Try to “convert” everyone that comes to your web site. By convert I mean capture their name, company, email, and phone number. Get this valuable marketing information by offering your visitors valuable content. Reports and videos are great things to use. Think about any content and information that would help your customer or prospect succeed - especially in a bad economy.

8. It’s time for family values. When hard times hit, people tend to go back to the nest. Try to position your product in warm, fun, family-oriented scenes. Even if your product doesn’t quite fit that image or is more business oriented, every product will affect someone. The image could even be a coming together of office workers around your product. “Paint the picture” how your product makes a warm, positive impact on someone or something.

Oscar Lama in a Really Bad Economy