Its a Nou Day!

Its all over the news right now, in case you haven’t heard, Bear Stearns is in serious financial troubles. Just a few weeks ago their stock price was hoovering around $100/share…today it closed at $4.81 after 2 HUGE drops. As a former stock broker, Ive had a few friends asking me what is going on. One friend in particular is very nervous due to a substantial position in one of their funds. The reason for this huge disaster has to do with their risky investing in sub-prime loans. Essentially they took a huge gamble that didn’t pay off. For those of you that are not familiar with ‘Sub-Prime’, its a term that refers to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself. Investors purchase these sub-prime loans because they tend to have a higher yield (interest rate). The higher yield is compensation for the added risk. Unfortunately Bear Stearns decided to place too much of their portfolio in these loans and since they are defaulting, their value is going down.

Not only has their stock value declined, I just read that they are not allowing their investors to pull their funds from their accounts so even if you have money with them, you may be forced to watch it dissappear before your eyes. On top of the already depressed economy, this type of poor business decision does NOT bode well with the investment community!

Although this is just one opinion, I predict that the worst is not over for the United States. Inspite of the bogus “economic stimulus package” that was talked about by our fearless leader, the combination of high oil prices and low consumer confidence are leading me to believe that we will be seeing more defaulting loans before the the economy finds a balance.

What should you do in times like these? I suggest that you take a serious look at your current investment portfolio and consider what is called a “flight to quality”. This is where you shift your investment dollars to vehicles that offer greater safety at the expense of yield. Instead of investing in the latest and greatest high-flying stock or high-yielding bonds, consider moving to investment that have been proven to withstand recessionary periods.

Although I dont get paid to give out financial advice (anymore). I would recommend lower yielding (and possibly insured) bonds and money markets at this time. If you like the stock market and feel that you are still at the age where you can financially withstand the ups and downs, then consider the core companies that can weather these bad times. Food and alcohol companies have always done a good job of getting through the financial storms because, lets face it, people still need to eat AND during bad times Americans tend to drink more alcohol…as funny as it sounds! Two example of this would be Costco (COST) and Anheuser-Busch (BUD). They have both fallen from their highs along with the rest of the market but they have great business models that cater to the current market conditions. Also, during times like these, be sure that your portfolio is well balanced and you don’t put all your “eggs in one basket”.

Disclaimer: Once again, I do not get paid to be a financial advisor but I did spend many years analyzing the market and did at one point manage almost $50 million dollars of my clients money…so please do your own due diligence before doing anything, especially during this type of market!

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