Four ways to dodge the credit crisis – MoneyWeek

Onbothaninstitutionalandindividualbasis,thespendingwasunbelievable。

Everyonewasinvestedinthestockmarket。

Weattendedparties,featuringprivateconcertswithJamesBrown(yes,thatJamesBrown),wherethetalkalwaysturnedtowhichInternetstockwouldtakeoffnext。

Howstocksweretheonlywaytomakemoney。

Doctorsandlawyerswerequittingtheirjobstoday-tradestockslikeAribaandCommerceOne。

Thereweremillionaireseverywhere。

Papermillionaires,thatis。

Guyswhoplannedtoretireat35。

Itwasanamazingtimeandplacetolive。

Butwhenthepartyendedinspectacularfashion,portfoliosplummetedandthedotcomeradied,takingjobsandfortuneswithit。

Andtoday,anotherspeculativebubbleisabouttopop

Thistimeitsworse

Thesedays,myfamilyandIliveinSouthFlorida。

Butinsteadoftalkingaboutstocksbeingthewaytowealth,theconversationturnedtorealestateastheonlywaytomakemoney。

Notsurprising,consideringFloridaisoneofthecountrysfastest-growingstatesintermsofpopulationgrowthandis,ofcourse,aprimedestinationformillionsofAmericasbabyboomers。

Butthetrendisnationwide。

Ordinarypeoplewithordinaryjobsbuiltorrenovatedthreeorfourhousesatatime,figuringtheycanflipthemforaneasyfiveorsix-figureprofitbythetimetheprojectiscompleted。

Andjustlikeduringthedotcomboom,whileafewpeopleenjoyedsomeprofitsatthebeginning,therearenowmanymorestoriesofpeoplewhoownfourhouses,butcantsellthem。

Buttheresabigdifferencebetweenbeingstuckinthedotcomvortexandtheincreasinglyseriousrealestatewreckandthisoneisworse。

Hereswhy

Centralbanksreactasforeclosuresjumpandborrowersfeelthesqueeze

Investorswhogotsuckeredintothedotcomdebacleendedupwithsomeshreddedportfolios。

Anuglyoutcome,forsure。

Butitsalotworsetobepayingfourmortgagesandeventuallybeingforcedintoforeclosure。

Overthefirsthalfoftheyear,foreclosurefilingsrocketedup58%to925,986,comparedwiththesameperiodin2006。

Whenmeasuredagainstthelastsixmonthsof2006,filingsshotup30%,accordingtoRealtyTrac,anonlineforeclosuremarketplace。

Andastherealestatemarketcontinuestosagandborrowersremainoverstretched,thefull-yearnumbercouldwellhittwomillion。

Unlikeinthestockmarket,wheremarketmakersorotherinvestorswillbuyyourunwantedstock(albeitatalessfavourableprice),thesehousesarebeingdumpedonthemarketbuttherearenobuyers。

Thisiswhywerenowstartingtoseethecreditmarketscrackandthestockmarketsreel。

Asinterestratesriseandhousepricevaluesdrop,borrowersarefeelingthefinancialsqueezeparticularlyinthesub-primemortgagesector。

Hedgefundsandinstitutionshavepackagedupthesebusinessesintofunds,availabletobuyandselllikeanyother。

Butthereisnoliquidityfortheseinstrumentsand,insomecases,noaccuratewayofpricingthem。

WevealreadyseenthedemiseoftwoofBearStearnssub-primemortgagefunds,aswellastroubleinthreeheldbyFrenchbankBNPParibas。

Andashedgefundsarebucklingundertheweightofthesecredits,thesectorhascrumbledandboththeEuropeanCentralBankandU。

S。

FederalReservehaverecentlyfloodedthemarketwithcashtooffsetthefallout。

Evenso,someofthemajorfinancialinstitutionswillnotbeabletoescapethiscrisis。

Whatitmeansforyourporftolioandhowtoprepare

TheFedandECBdidtherightthingbyinjectingliquidityintothemarketsandtryingtocalmfears。

ButthiscreditcontagionisseriousandIexpectthatwellfeeltheconsequencesoverthecomingmonths。

Herearefourthingsyoucandotodaytoprotectyourself



DumpTheSub-PrimeSlobs:Ifyouownafinancialstockthathasexposuretosub-primemortgages,getridofitevenifyouhavetotakealoss。

WerealreadyseeingthefalloutandIsuspectthesestockswillbehitparticularlyhardinthenearfuture。



SetStop-Losses:Therealestateslowdownandsub-primecollapseismakingthestockmarketveryvolatilerightnow。

Makesureyouemploystop-lossesontheotherstocksinyourportfolio。

Thatway,ifabroadandseriousdeclineoccurs,youllescapemuchofthepain。



LetYourLong-TermHoldingsLie:Ifyouownmutualfundswithatimehorizonoffiveyearsorlonger,donttouchthem。

Theresareasonyoureinthemandoverthelonghaultheyshouldbefine。



WhipYourStockWatchListIntoShape:Tofindoutmoreaboutcreatingawatchlistofstocks,see:Howtoprofitduringmarketvolatility

ByMarcLichtenfield,SeniorAnalyst,Mt。

VernonResearchfortheSmartProfitse-Report,www。

smartprofitsreport。

com

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