The financial sector is in turmoil, if not chaos, given the current dealings at Lehman Brothers Holdings, Inc. (NYSE/LEH). Now we hear that the government will loan ailing American International Group, Inc. (NYSE/AIG) $85.0 billion and take an 80% stake in AIG. As an investor, while the investment is questionable, the government really has no choice. We believe that it is only a temporary band-aid solution for a much deeper-rooted problem. The reality is that the government will have problems in continuing to help ailing financial companies, although it will probably need to in order to prevent a financial market meltdown, which is a real threat.
The housing market also remains in crisis, as evidenced by a decline in housing construction to a 17-year low, which in turn confirms the market’s nervousness regarding the housing sector and declining property wealth. With many homeowners now carrying mortgages that are greater than the market value of their homes, we are seeing record foreclosures continuing in the United States. At the end of the day, this cannot be good, as it will impact consumer confidence and spending, which will impact GDP growth.
The DOW retested its low of 2008 in trading on Tuesday, which we view as bearish. Failure to win any buying support could drive stocks lower in the upcoming weeks. The strength of the buying commitment will become more obvious as stocks edge lower.
My strategy is to wait out the current turmoil and watch for things to improve in the financial sector. The inherent market risk remains high and makes investments vulnerable to higher downside risk. We want to see some stability to surface before entering new positions, because of the downside risk.