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Markets: Turbulent Times
New York: January 21, 2008
By John R. Stephenson

Is there any end in sight to the stock market carnage we have witnessed? Is this the greatest buying opportunity in years, or a value trap that stands ready to decimate even the most solid of investment portfolios? Hard to say, but with The Standard & Poor's 500 Index having its biggest weekly loss in five years, it is getting ugly out there. All of a sudden, the economy is trumping the Iraq war as the number one concern among Americans.

Investors are panicking, as share prices globally have begun a steep decent. The financial services sector has been the area hardest hit by this tidal wave of selling because this is the sector of the stock market that is most directly linked to the current economic disaster. While there is plenty of blame to go around, hallmark companies such as Citigroup and Merrill Lynch appear to be among those most responsible for creating, selling and warehousing a whole series of loans and products linked to bad bets on real estate.

A housing crisis has morphed into an economic crisis because far too much cheap money has been chasing far too few good investment ideas. The bubble in US residential real estate is finally over and the stock market and the economy are the casualties.

But is it over? Not yet. Commercial real estate is likely the next shoe to drop. The reason? As residential real estate foreclosures skyrocket, housing subdivisions are faltering. This is bad news for local shopping centers that are already beginning to feel the pinch from reduced consumer spending.

With US consumption slowing, commodity prices have retreated and global stock markets are being battered. The reason for the global carnage is simple - the American consumer represents 18 percent of the world economy. That's a big deal! Investors globally are doing the math and realizing that a slowing America is a problem for their own economies and stock markets.

Ireland and Spain are witnessing dramatic declines in real estate prices as the bubble there is bursting. Other countries where a speculative run-up has occurred are likely next, as the US housing and financial services sector crisis have taken the world by storm.

For investors, these are turbulent times. Panic selling is the order of the day. In a world where the global media is headquartered in New York and money can be moved around the globe with the click of a mouse, investor sentiment is increasingly a global rather than a local phenomenon. It will get worse before it gets better.

So where does it all end? No one knows for sure, but for healing to occur there will likely need to be a cathartic event. We will probably witness the implosion of a major money center bank before all is said and done. In the process, stock markets may shed another ten or fifteen percent in value along the way.

Is it really different this time around? Perhaps. Unlike past economic slowdowns, this one is really a Wall Street rather than a main street problem. It is the banks that have created this problem and this is where most of the pain will be concentrated.

While consumer confidence is battered and consumption will likely slow, this time around employment levels are extremely high. Inventories are low, so further rounds of inventory liquidations will not be occurring. This is all good news for investors and while a mild US recession is likely in the cards, the duration and the severity will be short lived. And that's good news.

So what's a savvy investor to do? For my money, the bets to be making are in the areas where stock appreciation is likely to be highest after the panic selling subsides in a few months.

Precious metals, agriculture and energy are still the areas that offer the most potential upside for investors who are willing to look through these turbulent times.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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