Bob Brinker Is Ill but Still Sez...

Mr Brinker is ill. I listened to part of his Money Talk programme today, and one of the first things he did was apologize for the sound of his voice.

In my opinion he didn't need to apologize, but I can understand why he did. He was ill and he sounded like it, too. I hope you get better soon Mr Brinker. But thank you for being there while ill. I don't think anybody would have faulted you for taking a sick day, but you were there at work. Some people could learn a few things from that example.

But there's another reason that I'm writing about Mr Brinker, and that is because of some comments he made early in his show Money Talk. I've said before that I'm not as versed in financial matters as Mr Brinker is, and I'll say it again. I'm not as versed as he is. But he gave a rundown on the toxic paper (the writeoffs and the bailout.)

And, in my opinion, what he said makes a lot of sense.

When the bad debt is purchased from the institutions, there are a few ways it can be done. First, you could "buy high." That means to pay the "toxic paper" (the bad debt) at a price agreeable to the bank or institution that it's purchased from. The problem here, obviously, is that the taxpayer is forced to pay a higher price. And while this does help the institution and their lobbyists (and the politicians with ties to those institutions) it hurts the taxpayer.

But you could also "buy low." That means to pay the bad debt at a price agreeable to the taxpayer. Obviously, this is the opposite of "buying high" and hurts the institution that the debt is purchased from. But it does help the taxpayer who will end up having to pay a lower price.

Mr Brinker, however, came up with a solution that he believes would help everybody. And while I'm not as versed in financial matters as he is, it makes sense to me.

His solution is to do a straight injection of capitol (money) preferreds with warrants. (The warrants would be to preserve the equity involved in the transfer.)

It would be sort of the "middle of the road" solution. It solves the inherent problems of buying high and buying low by presenting a "best case" for both parties (the taxpayers and the institutions.)

Obviously, this presents its own risk because things frequently don't turn out the way we'd hoped they would. In fact, Mr Brinker said as much when he noted that the politician's quick fixes frequently didn't solve the problem. I'd go a step further and say that quick fixes usually make the problem worse.

There is no doubt now that our economy is in trouble. Deep trouble. Before, only one or two people were daring to use the "d" word ... "d" as in depression. Now more than a few are. Again, I'm not as versed in financial matters as Mr Brinker (or others are) but I do see perilous times ahead.

I've written before that now is not the time to get out of the stock market. The simple reason is that the stock market also obeys cycles. It goes up, it goes down, then it goes up again. Some times it could take years between cycles, but it always obeys the cycle. Getting out of the stock market now would be to volunteer to take yourself to the cleaners ... and not in a good way.

For example, let's assume that I own 1,000 shares of stock in XYZ Corp. LLC (The LLC means it is a Limited Liability Corporation.) (For the record, this is a fictitious corporation.)

Before the stock meltdown, XYZ Corp's shares were trading at $27.82. I had purchased them when the stock was trading at $12.01. Now it's time for some math.

If I purchased the stock at $12.01 and I purchased 1,000 shares, it would mean that I paid $12,010 for the stock when I purchased it.

At its high, the stock was worth $27.82. That would mean it would be worth $27,820. Now it's time for more math (sorry!) If it was worth $27,820 and I paid $12,010 for it, that would mean I had made a profit on the stock of $15,810. In other words, my profit would have been more than I'd paid. Had I sold it when it was at its high, I would have earned a handsome profit.

But now it's after the meltdown. XYZ Corp's stock was particularly hard hit (in fact, it took a vicious beating) and is now trading at $2.81! Now it's time for still more math (Sorry!!!) I paid $12,010 for the stock since it was trading at $12.01 when I purchased it. But now it's at $2.81 and I still own my 1,000 shares. It is now worth $2,810.

Remember, I paid $12,010 for it. But now it's only worth $2,810. That would mean I lost $9,200!

Remember, the stock market obeys cycles. It goes down, it goes up, it goes down, and then it repeats the process. You could say "Lather, rinse, repeat."

The point is that at some time in the future, it could easily be trading at more than it was before the current meltdown. Let's take another example. (And I do apologize, but we're going to have to do more math!)

Let's assume that it is now the year 2014 and let's further assume that I still own my 1,000 shares of XYZ Corp (LLC.) The meltdown is but a memory and the stock market has been bullish. (That means it's gone up ... way up.)

The stock that was trading at $27.82 before the meltdown, then went down to $2.81 is now up. Way up. In fact, it's 2014 and the stock is trading at $41.73! I still own my 1,000 shares, but now they're worth $41,730!

I purchased them at $12.01, so I only paid $12,010. Now it's time for the final bit of math. If it's 2014 and the stock is worth $41,730 and I paid $12,010 for it, that would mean a profit of $29,720. I'd be laughing all the way to the bank.

Obviously, what I've just given is a theoretical situation. It might happen, it might not. I can't (and wouldn't dream) to tell you what to do with your money. In my opinion, however, now is not the time to get out of the stock market. Remember, the market obeys cycles. It can (and some times does) take years between cycles, but it always obeys cycles.

It's your money, folks. Do what you believe best. Just please be careful.