The VP Debate to The House Vote to The Economy

The much anticipated Vice Presidential Debate is over and both candidates held their own. The economic crisis was a focus but no new solution was articulated. Tomorrow we may move to the floor of The House of Representatives to see if a vote on the Bailout Plan will take place. It is likely nothing will occur unless there are enough votes to produce a "Yes" vote. Either way, the focus will shift back to the economy.

Today's stock market tanked again and the VIX fear index escalated to levels close to its high last week. Is it the uncertainty of the Congressional vote that drove the market down or the weakness in auto sales, durable goods, manufacturing, jobs, and eroding home prices? It is a little of both but ultimately it will only be the economic factors.

Today, a bunch of insurance company stocks took a beating. Why? The reality that the assets they hold will also have to be marked down has finally hit the radar screens of investors. Most industries are being plagued by the financial crisis or from the weakness in the economy. Today's stock market saw the fertilizer companies get creamed. Why? Commodity prices dropped on average 9.9% this week, so far. Lower prices mean lower margins for farmers. These farmers may produce fewer crops because of the lower profit potential and/or because they won't be able to borrow money to finance their businesses. Fewer crops means less fertilizer and thus lower earnings for fertilizer companies. Hence, lower stock prices for fertilizer producers.

It seemed like most industries were affected by today's market downdraft. Some of the industries that had many stock prices drop more than 1% today were homebuilders, gaming, auto parts, paper, broadcasting, technology, wireless, airlines, auto manufacturers, building materials, and cable. Homebuilders declined because of the reported drop in home prices. Airlines have been driven by oil prices but today oil prices dropped again. This decoupling indicates that the weakness in the economy is now the driving force. Auto manufacturers and auto parts companies are weak as even a company like Toyota, the number one global car company, is showing weakness. We can cover each industry in a similar manner but the bottom line is that the extensive weakness throughout the economy, the credit crisis, housing, and the tapped out consumer are finally leading the decline in the stock markets globally.

We will need a restructuring of America and it will be a painful process. Businesses will be deleveraged either with new equity or the bankruptcy process. Many value oriented investors have performed poorly this year but new opportunities will arise in this restructuring process. The wealth building will likely come from four areas. Opportunities in treacherous markets usually arise when fear is greatest. Strong, well-capitalized companies will suffer stock price declines with the rest of the market but will be long-term winners. Let's take Warren Buffetts' deals with Goldman Sachs and General Electric. Berkshire Hathaway clearly got sweet deals so I wouldn't say today's stock prices for those companies won't go lower. In fact, they probably will go lower. However, both companies will likely be survivors with much higher stock prices in five years. It takes guts and risk to buy them but a long-term investment style will likely prove that Mr. Buffett has picked winners again. The second lucrative investment will be in distressed mortgages that professionals buy from financial institutions. The third winner will be sifting through the commercial real estate market upon its true decline in the next couple of years. This may not be an opportunity for most investors but the puchase of a home at distressed prices will likely produce nice returns in a five to ten year time horizon. Finally, distressed corporate debt will garner excessive returns either because the prices moved back to par (100 cents on the dollar) or through a restructuring of a company in bankruptcy where the investor exchanges debt for equity.

Most investors will remain on the sidelines in these volatile markets and let the professional money managers take the risks in a down market. The key is to maintain cash in order to be able to buy stocks when the economy starts to get better and the stock market begins to rise again. Be patient because it may be a year or two away for that scenario to present itself.