Who’s Next: Bailout and Failure

Sorry for my long layoff. The market has not been doing much, so there really isn’t all that much to discuss. However, we are nearly five full months into 2009 and a lot has happened. As a matter of fact, it appears that two more of my predictions for 2009 may in fact come true. One is that one of the big three may fail. GM is under pressure to restructure its debt and cut expenses by June 1st and I do not think they will make it, but you never know. The second is that the Federal government may have to bail out California.

I’d discuss those situations further, but both are extremely complicated. I can summarize GM’s situation as dire and most likely will have to be taken over by the Feds, much in the same way as Fannie May and Freddie Mac. If not a take over, then bankruptcy is the only other option. If you own any GM shares, sell now and shame on your for holding them this long.

As for California, their main problem is the fact that the majority of the state’s tax income is directly linked to property values. When times are good for the housing market, the tax revenues are sweet, but when foreclosures and slumping housing values occur, then revenue is a little thin. The problem with California is not so much the lack of tax revenue post-housing crash, but what happened to the loads of money that came in from 2004-2007 when homes were overvalued? It was spent is the answer and the budget they are used to working with has a huge gap ($20+ billion) as a result. Way to plan for the future Arnold!

Anyway, enough of the bad stuff. I’ve got good news!! The market has stabilized and is up about 25% since the bottom in early March. Housing prices seem to have stalled and are no longer in a free fall. What does all of this mean? It means that we have about 6-9 months before we see the economy start to grow and unemployment start to shrink. We should see this recovery start between December 2009 and February 2010. Of course, it won’t be officially acknowledged until the middle of 2010.

Stay focused on the stocks you own and if you feel confident; start buying in slowly. Beware of the banks and other financial sector companies. I still think that there will be at least one large bank or financial institution that will fail before the year is out. Be sure to do you homework and understand the risks involved when investing. Patience, due diligence and having clear investment goals are the ingredients in choosing solid companies to invest in which are appropriate to your investment goals. Good luck and no matter how the market reacts, good or bad, always have cash on hand. If you are 100% invested, then you need to start selling some stocks or adding cash to your portfolio. Having all your money in the market constricts your flexibility. With a dynamic market that exists nowadays, you have to be able to make moves quickly and take advantages of the drops. No matter how good or bad the market is, you need to have a healthy amount of cash on the sidelines ready to jump into the game at a moments notice.