Monday, March 26, 2007

On Business Cycle and Consequences of Short Squeeze (Part 3)

There are peculiar lesssons for the unbeliever in Armstrong's proposition...I have tried to pin point three lessons learned and they are presented below:
Points for Your Personal Finance
1. Get more defensive in investment style. Cash flow more than growth or relative PE will now counts more for stocks. Companies (especially the Large Blue Chip) that have benefited from the mind boggling profit of the past few years and have used little or none of it will benefit from a greater interest rate and better market position to punish the small speculative plays that have depended on cheap money to stay afloat. Many companies will fail like those sub-prime lenders like NEW and NFI have shown, and it is useless staying in the path of a moving train. Back to basics like Fundamental, Value and Large Cap investing will win going forward.

2. Reduce high interest rate debt. The era of cheap money is truly over. As regulators tightens, so will other rates tighten up on consumers. Credit score will matter more going forward than ever.

3. Build emergency savings account and/or Roth IRA that doubles as one. The dollar will ultimately crumble under the weight of debt, but intervention is not unlikely. This will drive its rate upwards overnight causing a desperate short squeeze on the dollar--cash will then become king. Understand that the net effect of this is continuing rise in interest rate for the least credit worthy...so only an interest earning account is positioned to capture its net benefit.

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