Subprime & Market Meltdown Advice

The meltdown in the subprime mortgage market has led to a 10% sell off in the stock markets. Don't lose your heads, some of us are buyers here!

I want to take my hat off to Liz Ann Sonders of Charles Schwab for a most excellent article titled "Inside the Subprime Storm" What’s driving it. What it may mean to you."

In the article, Liz explains the trouble well starting out with:

• "The trouble began with “collateralized debt obligations,” or CDOs for short. Once called CMOs (collateralized mortgage obligations), CDOs are derivative securities backed by pools of bonds, loans (including many subprime) and other assets. They’re unique in that they represent different types of debt and credit risk, packaged into tranches with different maturities and risk profiles. The higher the risk, the higher the yield.
• For years, CDOs were a money machine that helped line the pockets of hedge funds, private equity shops and investment banking firms. But now the money machine is busted."

I especially like her concluding advice:

• "What to do: In periods of extreme volatility, we believe the best strategy for long-term investors is to do nothing. Don’t panic, but don’t try to bottom-fish a highly volatile market. "

At times like this, I prefer to use some of the assets in my "explore portfolio" to buy stocks that have corrected. You can read in our CACS Forum where some of us have been buying a very volatile stock in the hopes for some quick gains on any market recovery. Also, when the market has had a major 10% correction, it is a great time to rebalance your portfolio to hopefully take advantage of buying some cheap shares.

Disclaimer. I own CACS in my newsletter and personal portfolios with significantly lower "break-even price" than the current price (as of 8/16/07.) That is I could liquidate now with nice gains and I probably won't post about it before hand. My most recent buy was at $3.85 and I hope to make a nice gain on this when the subprime dust settles.

Link to Lis Ann Sonders article: Inside the Subprime Storm