The Street is sure Bloodied and Gutted

Well its been a long time since I wrote anything, but given the state of the markets and now that I have a social life again, I thought this would be a perfect time to comment on what has been going on.

Well very few people out there who thought the market conditions would get this bad! We have a complete credit freeze in the commercial bond markets, commodity prices have collapased from being overvalued, a recession beginning in North America and Europe, slower growth in Asia and major U.S. and European banks needing government assistance because some math egg heads concocted financial instruments that no one can understand, but all the major pension/stock brokers managers bought alot of them for their client's portfolio (not my stock broker). Since we all know the obvious since its on every headline on every major newspaper, lets not re-state it anymore and focus on what to do.

The are only a few things to do, sit tight on your stock positions (I am assuming they are solid companies with good cash flows and credit ratings) and start buying!.Yes folks, if Warren Buffet, the worlds largest investor thinks it a good time to deploy cash, then so should you. No one every made any money when they purchase stocks when the market is going higher, and then sell when a Bear market hits. Unfortunately, so many people are doing that right now, and that is called Herd mentality. Its never easy going against the grain, but those that do coupled with making smart investment decisions always are ahead of the game.

So what is it that that everyone seems to be avoiding the most? Well commercial bonds, preferred shares, and financial companies. This is the stuff you should be BUYING!! Like most people, I have taken a hit on my bank and financial stocks, but neverthless, you should be good quality firms in this sector. Because eventually, markets world wide will stabilize. This part of the economic cycle is normal after a period having being in an excessive and speculative growth phase. Ignore all this depression talk. In the 1930's, we had unemployment at 25%, trade barriers, no type of welfare system as a back up and a no regulation. We will have a recession, but depression?? I wouldn't bet on it.

I just bought some shares in Ishares U.S Preferred Index (symbol PFF-NYSE) at around $26 and it yielded at the time 10%. Now its even lower at $25. The reason I like this stock is because it owns a lot of different preferred shares isssued by mainly financial companies and so the risk is spread out. (Preferred shares are stocks issued by firms that pay higher dividends than the common stock)Right now this index is down close to 50% from its highs and you are getting a nice fat yield while you wait.

I bought some shares of American Express (AXP-NYSE). This 52 week of this company is $63 and I bought it at $35, now its around $27 and it is paying a 3% dividend yield. This company is also partly owned by Warren Buffet. American Express has been hit by the financial crisis like everyone else, but the difference with them is they have more conservative lending standards, a wealthier client base, a global brand name and very good management. Could this stock go lower? Sure it could, but your downside risk is a lot less at these levels and they are still making money.

I also like a Farmer's & Merchant Bank (FMBL-OTCC. The stock trades around $4550 (yes that's four thousand) and is incredible well run. They have the label of being the safest bank in California where they are based and they are very well capitalized with hard cash. All banks are supposed to have a 4% minimum of cash on their books to deal with potential losses, the FDIC in the U.S. considers any bank that is above 8% to be well protected. Farmer's has 26%!!!! This means they have lots of cash on hand to deal with potential losses and make acquisitions. They have a very good management team and the shares are down a lot less than most other banks. They pay a 2.4% dividend yield, that is very safe and have very conservative lending standards, which has proven to be an excellent strategy. Yes, the stock is expensive, but investing is about what your percentage of return is going to be, not the price of a stock.

I also really like Commercial bonds issued by companies like J.P Morgan, General Electric and any other solid company with an investment grade status. Folks, no one wants to touch these bonds, thats why you should own them. Inflation is coming down which means your real return is going to be higher, the bonds are trading at a discount, solid blue chips companies with good balance sheets are not going to go under and bond holders get paid first before anyone else. You can buy these commerical bonds either through index funds or individually. At the yield these bonds and preferred shares are paying out, are just too tempting to avoid.

Market conditions will not be like this 5 years from now, stock prices barring anything catastophice like nuclear war will more than likely be higher, credit will return as central banks are pumping money into the markets like never before, goverments are under pressure to help out and interest rates are low. We are in a a crisis, but this does not mean the end of capitalism.

All the stocks I have previously reccomended in my other blogs are solid firms, and I have been buying more when I can of the same stocks.

Don't be part of the herd, be a wolf and take advantage of the volatility by pouncing on good names. You will be a lot richer for it.