It's been a while...

When I started this blog, I started with the intention of writing once or twice a week. I wrote an entry in November... and now we are in September, 10 months later. Between those two dates I have graduated, moved cities, bought a new home, started a new job, studied for and wrote a big exam, partied and... well I haven't had much time to work on this!

I enjoy writing though so I am going to try and restart this effort. The caveat here: if you find financial / market news boring, stop reading this, because you will find it painful and worthless. If you do follow the market at all or are interested, read on.

I'll start with a comment about my Lululemon (NASDAQ: LULU) pick. I called for a buy at $39 - $40 in November 2007.. subsequently, it traded up to about $50 in December, a month later. If you timed this right that would have represented a 20% pop, not bad for a one-month hold. Unfortunately, what hindsight now has provided us with is a broader perspective of what the hell was happening with market. LULU, being a consumer discretionary stock, has tumbled and is trading around $18.

That is what this post is about: the state of the US, Canadian and global economies. It's ugly. Everyone has heard of the subprime mortgage crisis in the states: banks went out and let the average Joe's in the US to obtain a mortgage, even if they couldn't really afford it or have the credit score to do so (hence the term "subprime" - these dudes are not prime borrowers). They charged a higher interest rate for these mortgages, which means more income for the bank, and life was good. Joe has his house and makes his payments. The bank gets there payments and are happy. If Joe stops making his payments, the bank repossesses Joe's house and sells it. With real estate values climbing in the States, no problem. They sell it and get there money back. The bankers in New York figure they want in on all this money action so they figure out how to package a bunch of mortgages together and sell them to investors (which is where financial instruments like mortgage backed securities and asset back commercial paper are derived from.. which I won't get into).

Uh oh. Then the US housing market slump comes into play as the number of buyers is drastically reduced by the slowing US economy. Remember supply and demand in economics class? What happens when nobody wants to buy something? The price goes down. So housing prices started going down. With the economy faltering, guys started to lose their jobs. Now they can't make the payments on their mortgage. They default, and the bank takes their home back. Problem is, they turn around to sell this home, and they can't sell it for as much as the mortgage is. This snowballs: more and more homes go for sale at lower prices, but nobody is buying. The investors were supposed to get this stream of payments from these mortgages get screwed, the banks get screwed, Joe lost his home, so he is screwed, and voila! You have the US subprime mortgage crisis: it is ongoing. It is this crisis that lead to the collapse of the Bear Stearns investment bank. Everyone is getting their faces ripped off.

How does this affect you and I as investors? Nobody really knows when this subprime crap will be over. The US economy is damn near a recession, the Canadian stock market is all over the place with Ontario also near recession and our market going up and down like a yo-yo, following the price of oil (which we produce a lot of). The markets don't seem to be making any money and everyone is uncertain and shaken about the markets. Investors are scared. This is not a good time to be trying to play the stock market.

What do I think investors should do?

A lot of people my age say "hey Morgan what should I invest in? I have a couple grand and I want to make money." My answer today is keep your couple grand in cash - or something that is really close to cash. Cash is essentially risk free, so you won't have a negative return on it. However, cash sitting in your chequing or savings account will make you next to nothing, so don't do that with your extra cash. I would be buying into a mutual fund that invests only in Canadian T-Bills. This way you'll make about 3.5% to 4% on your cash (for as long as you leave it in there).. Doesn't sound like much, but it is better than piling your money into the market and losing 10, 20, 50 or 100% of your money.

To summarize: Cash is king. Stay out of the stock market. Don't buy GICs cause they lock you in for some period of time - the T-Bill fund can be traded daily and is a very liquid market. You won't lose any money, you won't make very much, but you also won't lose sleep or lose your shirt. Cash won't rip your face off.

Hope I didn't bore you too much :)