With Markets a Bottomless Pit, Concentrate on Cash Flow

March 2, 2009 by  
Filed under Investing

As I write this, the U.S. stock markets are not yet open but Asian markets are continuing their free-fall.   The European and U.S. markets are sure to follow, after the European Union announced its refusal to help either its car companies or the hapless Eastern European economies.

The European and Asian economies (perhaps excluding China because of its strong foreign currency reserves and manipulation) are mostly in much worse shape than we are.  That is important because our recovery cannot gain serious traction without functioning export markets.  

As a clear sign that no one is buying much of anything, the China Purchasing Manager’s Index remained below 50, indicating a seventh straight month of a slow down in manufacturing in China.  European manufacturing also declined at a record pace in February.

Adding to our bad news is that money rat hole known as AIG which reported a $67 billion quarterly loss and is going to need billions more from the U.S. Treasury, money which it doesn’t have. 

Those that rely on technical analysis of the U.S. markets are floundering, to say the least.  There is nothing in their charts that shows that we are at or near a support level for stock prices.  One such expert (economist Peter Navarro) describes the S&P 500 as experiencing a “Point & Figure double bottom breakout” which he translates into a “bottomless bottom.”  

Some technical analysis consultants are recommending both the DJIA and S&P as short sells for the foreseeable future.   Is there any reliable economic data to undermine or counter this negative outlook?  I haven’t seen or heard any.  Have you? 

Gold is back in the headlines with positive movement.  Why?  Because investors can’t think of anything else to do with their money.

Nothing that the Obama Administration has said or done has even come close to slowing the investing death march.  Perhaps if our President had fired a rifle instead of a shotgun at our problems, there would be more room for optimism.

So why is Mr. ToughMoneyLove saying all of this?  The answer is that I am only saying what I am thinking. But I do have a point and and some suggestions.

Scott Burns wrote a timely piece this week, reminding us that our wealth is not our standard of living. That is a principle I can agree with.  It is also something worth building a financial strategy around when you are looking into the bottomless pit of our stock markets.

Therefore, I’m also thinking these things about our own financial plan:

Don’t have anything in the stock market that you will need to sell in the next 5-10 years.

Start your tax planning now (as in finding ways to minimize the effects of the government wealth grab that will be starting this year.)

If you are content with the “stocks are on sale” concept, I would dollar cost average your way down to the unknown bottom, as a risk control measure.

For the foreseeable future, maintaining income will be more important than building wealth.   At this point, just keeping your place in the line of investors waiting for a recovery would be a good outcome.

Watch the cash flow constantly – adjust expenses (downward) as needed.

Invest to Anticipate Inflation

Find other strategies for managing financial risk.

Not all of these steps will necessarily help your bottom line.  But they can help minimize the damage to your standard of living and prepare you for an escape from this economic pit of despair when the good (not so bad?) times return.  

The better times will return – won’t they?

Image credit:   Caetano Lacerda

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17 Responses to “With Markets a Bottomless Pit, Concentrate on Cash Flow”
  1. Warren Buffett points out in his annual letter (released this past Saturday) that the economy is in shambles and will remain so for 2009 and probably beyond, but this isn’t necessarily an adequate predictor of what stock prices will do. Markets are fickle creatures. News can send them into a free fall or spike them upward at alarming rates – or not effect them at all. There are too many variables to predict markets over any discernable period. We know the news today – we don’t know it tomorrow. If economic knowledge correlated to success in the stock market, most economists would be far richer than they are. With the exception of Keynes – most economists of note weren’t great investors.

  2. Nice article Mr. TML

    “Watch the cash flow constantly – adjust expenses (downward) as needed.” Aka be Frugal.


  3. Matt SF says:

    The fundamental analysts have confirmed the technical analysts bleak predictions. I’m a follower of both, and when you combine them with behavioral economics, all three seem to point to the S&P going lower.

    Primary reason – S&P 500 earnings outlook is horrible. When corporate profits take a 60% nosedive, you don’t want to own equities.

    Secondary reason – we’re in a period of uncertainty. NOBODY seems to know what the Obama administration is doing, and the market hates uncertainty. Are we socialists? Capitalists? Some sort of screwed up chimera? For this reason, money managers don’t want to invest large sums of capital and everyday folks don’t want to buy “stuff”.

    We’re entering a “Darwinian flush” for equities but our current economic policies are trying to slow it down rather than ripping the Band Aid off quickly. The possibility of watching the S&P slowly fall lower each month is a realistic possibility I’m afraid.

  4. goldenrail says:

    Most of my savings is in the stock market and I’m about to graduate into the unfriendly job market. I’m thinking of pulling it out and putting it in a CD at my small regional bank. Does that make sense?

  5. Rick Beagle says:


    It is funny, but if the country had followed your directions for the last fifty years we wouldn’t be in the predicament. We are seeing the results of fifty years of living beyond our means. Unfortunately, just as the baby boomers roll into retirement, they get to see much of what they worked for evaporate.
    Obama has only bee president for two months, this fiasco has been fifty years in the making. People are going to be upset and wanting to scream to high heaven, but in all honesty, they only have themselves to blame.
    When your policies, and your 401k mentality encourages short term gains at the expense of long term stability, well this is what you get. Cracks in the foundation that literally bring down the entire house (clever use of words if I say so myself).
    Rick Beagle

  6. MasterPo says:


    When Obama speaks the market drops 100 points. Like clock work.

    I don’t believe in coincidence.

    He may have taken office on the cusp of a downturn, but he’s been pushing this beast into the ground all the way from election day through today.

    Now please excuse me. I have to figure out how I’m going to spend my generous $13/week tax credit.

  7. Rick Beagle says:


    Okay, you keep believing that. It couldn’t be because of the bad news that keep spewing out of one company after another in one country after another could it?
    On the other hand, he is working hard to try and fix many of the very things that got us here. Of course there will the usual kicking and screaming, but if it was easy or popular, it would have been done already.

    On a positive note, the Republicans finally are pushing forward some ideas. Of course I see this as a more of the same, but hey, you can dissect it for what it’s worth.

    I’m personally a fan of Paul Krugman, and here is what he said of the budget. I know the Right don’t have a lot of respect for Nobel prize winners, but I tend to give them a good listen. Today he had some good comments on the makings of this economic mess.

    The left wing blogs, and even WSJ are claiming that there is a concerted effort by the Koch clan to derail Obama’s efforts. Of course places like Crooks and Liars are all over it. But surprisingly so is “Playboy(insert your own joke about the articles)?

    With all the negative publicity these people are dreaming up no wonder the markets are skittish.

    Rick Beagle

  8. kitty says:

    MasterPo, at least you get your $13 a week tax credit. I am “too rich” for that.

    Rick, the way you talk is like only we baby boomers are responsible for the credit crisis. Also, the fact that it is “50 years in the making” is your personal opinion, it’s not a fact. Current credit crisis wasn’t “50 years in the making”. Nor is your generation any better with living within their means than the baby boomers. Incidentally, when I got my first real job (not counting teaching assistantship)in 1983 most people were living within their means. I am also wondering if anybody compared the level of debt of baby boomers with that of younger generation. Do you have any statistics that shows baby boomers are saving less than the generation X? Also, when I bought real estate in late 80s, early 90s and mid-90s, the banks checked what I could afford and verified every single thing. So how is this crisis baby booomers’ fault?

    As to the federal debt – it seems Obama is doing a lot to increase it. And I am not talking just about items that can actually help the economy – I actually do agree that some sort of a stimulus is needed; I even agree with some parts of help to homeowners (except for cram down provision). I just don’t see that much in the stimulus bill that will stimulate the economy and a lot of waste. Do you really think, for example, that $13 a week will stimulate the economy? What about congressional budget?

    Additionally, this credit crisis isn’t just about individual debt. If the banks’ losses had been just the debt losses, they could have written these losses off easily – over 90% of mortgages are still fine. It’s the whole derivative mess that amplified the losses exponentially, and I am not at all sure that it were baby boomers that invented CDOs, CDO squared, CDS and the like. Or no-money-down or any other type of creative mortgages. Nor were it only baby boomers that gave out bad loans.

    In one of your previous posts you were blaming Reagan, but I assume you weren’t working in the 80s, so you have no clue how bad it was then. When Reagan came to power, the unemployment was higher than it is now, and we had double-digit inflation that Carter created. Reagan got us out of that mess. Yes, he increased the deficit, but in the years that followed tax revenues increased as more people got jobs. Also, at that time, most of the government debt was owned by Americans, so it wasn’t nearly as much of a problem as it is now. BTW, A lot of Obama’s policies sound very similar to Carter’s …

  9. Rick Beagle says:

    my line:
    “there is a concerted effort by the Koch clan to derail Obama’s efforts.”

    should read:
    “there is a concerted effort on the part of business lobbyists and the Koch clan to derail Obama’s efforts.”

    It also looks like the article in Playboy is down for the moment. I have already sent them a link broken message. The article is quoted rather completely at Crooks and Liars, so if you can stomach the liberalism, you can read it there.

    Rick Beagle

  10. Rick Beagle says:


    Have you peeked at the national debt graph for the last fifty years? You can find it here. A picture is worth a thousand words.

    It would seem that my comments about Baby Boomers and their style of governance has hit a nerve. It is indeed my opinion that my parents and their generation allowed our federal and state governments to put us in this precarious state. While the catalyst of the current crisis is more recent, our inability to combat it is as a nation is indeed fifty years in the making. We are a bankrupt nation and neither President Obama, nor generation X did that.

    As for Reagan causing some of our issues, again I repeat my condemnation for short term thinking at the expense of long term solutions. Reagan’s answer to a flagging economy was to spend wildly while discontinuing federal funding for research and development of alternative energy. If I remember correctly, and I do, that was the underlying problem with the economy during the Carter administration (we all remember OPEC).

    Skip ahead a few years, and guess what the catalyst for our current economic crisis was? Rising Fuel Costs! Oh the irony. Of course, the greed of our wall street tycoons created a bubble in the economy (real estate…again) and boom, the entire thing comes crumbling down.

    No worries, we have credit in reserve to resolve this issue? Um, no, I guess we don’t. The home of the fiscally responsible conservatives looted the Treasury while allowing long term investments to go underfunded (education, and levies).

    How is this not the legacy of the Baby Boomers? I am not saying that you did everything wrong, but surely you folks to own up to some of this?

    It doesn’t really matter in the long run, we all have to clean it up. I just wish some of the baby boomers claiming fiscal conservative roots while praising Reagan, and the Bushes would just stick a sock in it.

    Rick Beagle

  11. TMN says:

    I’m curious about something. Mr. TML, are you hanging on to your stocks?

    Personally, I’m relatively young (26) and have been paying debts from college and the costs of starting a career, and only recently started saving significant amounts. All the stock I have is compensation from my employment. I’ve been learning about the market with the intention of getting in eventually, and as someone who’s still basically an outsider, I can’t imagine taking cash from my safe and sound bank and CD accounts and putting it into the market right now. By several strong indications which you yourself mentioned, the DJI has something like another 2 to 3 THOUSAND left to fall before hitting historical prices, and that’s assuming it won’t over-correct.

    If you think it’s going to be even half that bad, it seems like it shouldn’t matter how much you’ve lost in the past 6 months, you should be out NOW. At the very least, sell everything now and dollar-cost average yourself back in on the way to the bottom. So what’s your plan? Are you practicing what you preach? If you’re still holding on to what you’ve got, what’s your reasoning?

  12. TMN: I have a tax deferred retirement portfolio that is well diversified across different asset classes include equities. I have not pulled out although I did sell some financial stocks last year from our taxable accounts. I will not need these retirement funds for at least 8-10 years. I do not want to sell because no one knows where the bottom is and I do not want to miss the recovery. On the other hand, I am putting new retirement account money in non-equity asset classes to lower my exposure. Other new money is being used to pay down mortgages.

  13. kitty says:

    There are times to worry about deficit and there are times not to do so. Economies don’t always get out of the crisis on their own. In the 1929 the government worried about balancing budget and it didn’t help the economy, did it? Unemployed people don’t pay taxes, so bad economy is no less a threat of budget than spending. What Reagan did lead to more employment and more revenue. Which is why I have less problem with the spending to stimulate the economy even now (assuming all the spending indeed stimulates the economy) and to get us out of this, and to unfreeze the credit markets than I do with budget. Your points about not investing in alternative energy in the past do have merit, though.

    BTW – I voted against Bush both times, although I did vote for Reagan and against Obama. I am neither a republican nor a democrat, and I decide based on issues. I have mixed feelings on stimulus and bailout packages, but I do think the budget is bloated and has a lot of stuff we cannot afford now, as well as stuff that is going to hurt investment. Does Obama need to deliver on all his budget promises at once? Does he need all of this massive spending in his budget at this point when a lot of money is already spent on trying to get the economy going again? Certain things he wants to do may be nice, but why not postpone them until the time the US government actually has more people working and bringing in revenue? Or maybe the US savings rate is sufficiently high again that more Americans are buying government bonds than Chinese? And is raising taxes on businesses corporations that give jobs to people or on investors whose help he needs to buy bad assets is a good way to stimulate the economy and investment? Also, is a family of a couple of engineers with two kids living in NYC and earning 250K really rich? What about a small business?

    The situation now is very different from the time of Reagan or even from 10 years ago. At that time most of the US bonds were owned by the US citizens – so government’s interest went back to the US citizens who paid federal taxes on the income back to the government. Now it’s Chinese. The US citizens may be happy to lend the US government money for some things. Chinese is a different story entirely. Chinese may be willing to lend us money for spending that will stimulate the economy and help them too. But other items in the budget is quite another matter. If Chinese don’t want to finance these things, they’ll refuse to buy our government bonds. Then the rates will go up and we’ll get inflation. This is what makes this budget so dangerous.

    For the record – I may be of a baby boomer generation (49), but as I spent first 19 years in the Soviet Union, I am not technically a “baby boomer”.

  14. Rick Beagle says:


    Thank you very much for your comments, and your comments about China are absolutely correct. It is my belief that China was consulted on the budget before Obama put it in front of congress.

    I also think it is terrific to see people arguing about elements of the budget in its working form, but realize this is the first step in a process. Proclaiming the whole thing a fiasco (or a godsend) based on the first draft is probably a bit premature.

    Your comments about corporate taxes are interesting. On its face value it sounds convincing, but the liberal pubs are spinning it differently.

    In so far as your comments about 250k in NYC, I understand your comments, but like everything there are two sides. For example, I could argue that you live in a very desirable location, and just because it stretches you economically does not make you “less rich”. But before you think I embrace that opinion, please note I’m a flat tax (with slight scaling) kind of guy.

    Anyhow, lovely chatting with you.
    Rick Beagle

  15. MasterPo says:


    I was being sarcastic to Rick. I’m not getting $13/wk, just like I didn’t get any stimulus checks last year. And I’m really afraid the Messiah is going to take away a certain important tax credit I am counting on for my 2009 taxes! :(

  16. MasterPo says:


    So what if NYC is a “desirable location” that “stretches you econommically”? Kitty is 100% correct. $250k in NYC is no where near comparable with $250k in say northern Maine.

    BTW, did you hear that NJ and NY are considering imposing a “millionaire tax” on people making $250k?

    That does real good for motivating someone try hard and succeed.

    No one believed Joe but he was oh so right!

  17. Rick Beagle says:


    You were being sarcastic to me? *blink* Say it isn’t so! :-)

    And you think those “millionaire taxes” will be an impediment to working hard and desires for success? Oh my, you underestimate the vanity of the wealthy! In NY and NJ they would kill their mothers to be able to complain about paying the “millionaire’s tax” – loudly, and in public! :-)

    People will work harder just to tell people they pay that tax. People are crazy there, what can I say?!

    Alternately, you can save a buck or two and head down to South Carolina. I hear their governor is very fiscally motivated. :-)


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