"Just tell them to bring their shares over here, and I'LL PAY FIFTY CENTS ON THE DOLLAR."
Posted on 12/01/2007 6:49:43 AM PST by frithguild
THE BOTTOM IS IN. Yes, I know I've been too early in saying to buy stocks during the correction from the October highs. But all the classic signals of a durable bottom are in place now. Let me count the ways.
One. The sell-off last Monday was a classic panic. It was the kind of emotional climax you need to see before you can be sure that everyone who is going to sell has sold.
Two. Despite the panic, stocks didn't make new lows against the August bottom. Yet the news background has substantively gotten worse, with evidence of large losses in the banking sector having emerged. That tells me that the reality, bad as it seems, is far better than the worst-case fears.
Three. At the close on Monday, my valuation model showed stocks being cheaper than at any point since 1984 (which is when reliable data for my model first became available). On Oct. 9, 2002, the bottom of the second longest and second deepest bear market since the Great Depression, my model showed stocks 55% undervalued. Monday the same model showed them 59% undervalued.
Four. Monday's close marked the first time in this whole bull market that stocks have fallen by more than 10%. On Tuesday morning, the media were full of how this is now an "official correction" — and most accounts suggested that meant more downside was a sure thing. The media, with its obsession with simplistic market folklore like that, is always wrong at turning points.
Five. On Tuesday morning, seemingly by coincidence, a powerful news catalyst arrived on the scene. The distressed bank Citigroup (C: 33.30, +1.01, +3.12%) announced a $7 billion capital infusion from the Abu Dhabi Investment Authority (ADIA). That means the worst-case fears that this major bank will run out of capital to sustain its business (and its dividend) are unfounded.
Six. ADIA's investment in Citi means that stocks have gotten very, very cheap. Mega-investors like that only step in with $7 billion when they are getting a deep bargain.
Seven. Similarly, Freddie Mac (FRE: 35.07, +5.56, +18.84%), the giant government-sponsored mortgage investor, needed a capital infusion too, and went to the public markets to get it. Its preferred stock offering was oversubscribed by eager investors itching to get a piece of this franchise institution on the cheap.
Eight. Since Monday, some really terrible news has come out and the market hasn't reverted to panic. Thursday's story about massive losses in money market funds operated by the State of Florida's pension plan would have caused stocks to crater, if it had come to light last week. But now, stocks shrugged it off.
Nine. Despite widespread fears of an impending recession, earnings continue to be remarkably strong. Downward revisions for the financial sector are dragging down overall earnings slightly — but even including those losses, S&P 500 forward earnings are less than a percentage point off all-time highs. And if you take out financials, the rest of the S&P 500 is showing all-time record forward earnings.
Ten. While many feared that the Federal Reserve would not cut interest rates at the upcoming FOMC meeting on Dec. 11, speeches this week by Chairman Ben Bernanke and Vice Chairman Donald Kohn made it pretty clear that there will indeed be a cut. Even though they see the economy as basically strong, they want to provide the liquidity necessary for distressed credit markets to mend.
What are the arguments on the other side? You certainly don't need me to tell you those. Just open any newspaper, browse to any financial web site, or watch any business cable station. Pessimism is rampant. It's the new religion. The ministers of doom are preaching financial Armageddon on every street corner.
And that's my eleventh argument. There's just so much pessimism out there, so much doom, so much gloom, such utter certainty that America and the rest of the world is headed into recession — or worse! — that it just can't be right. The majority consensus is never right. Never.
I'm going to stop here. Usually this column is about twice as long as this, but there are times when it's best to keep it simple.
And it really is simple. You want to buy stocks when everyone else is panicking. Or to be more precise, you want to buy stocks when everyone else was panicking, and the panic is just beginning to subside. That's precisely where we are now. It's an extraordinary opportunity if you have the courage to grasp it.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.
Buy? With what??
;-)
Buy or bye bye.
Buy or bye bye.
ADIA is getting 11% interest on a deal to save CITI's but. That is worse than junk grade.
I take it that means you are ‘all in’ already! Like some of the rest of us who bought on August 16th, recognizing the liberally insane media at work! Then again on Monday. I mean I may be an eternal optimist, but the author’s Math doesn’t lie! Our kids who are currently funding their 401K’s at bargain prices are trully blessed.
Brilliant piece, it’s great to see the DOWJONEs editors are allowing the intelligent pieces to shine through.
This is what is upside down about stocks. Forward earnings are just a guess. Financial forward earnings were just fine until present earnings weren't. What is wrong is that "investors" for years have beein buying stocks with future earnings expectations already priced in, thereby taking all of the risk off of the seller, who nevertheless was able to reap most of the rewards. If the future is so rosy, then the big guys can take a position and make a lot of money selling when their predictions come true.
“So then I should panic when folks are buying...”
You only need to worry about choosing the correct stock.
Oh also, look for good tips.
Whoa there! Now, there is some real analysis based on irrefutable fact.
"Just tell them to bring their shares over here, and I'LL PAY FIFTY CENTS ON THE DOLLAR."
How about 11 reasons to buy American?
By way of comparison, the bottom in 2002 on the DJIA was 8,000 compared to a 2000 peak of 12,000 or about a 33% drop. In 1987 a similar % drop occurred.
What makes this different is the action in credit markets and housing, a problem that is not going away, and there is little argument that it has.
Yes, yes, yes, lets part a few fools from their money. LOL
About a week ago the Dow Theory sell signal was confirmed. (DJIA confirmed transports.) That means we are in a bear market until the trend has reversed. Dow theory doesn’t say how deep it will go or how long it will last.
I don’t think this is going to be the BIG correction, but it likely will go down further than this before the bull resumes.
FWIW.
Some of the tips I’ve received have petrafied me, but I would buy now which seems risky but may keep our family secure in the long run.
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