The S of course is for Mr. Spock who was known for being coldly analytical about everything, well maybe everything except the green women. Or was that James Tiberius Kirk?Anywhoo can you be coldly analytical about the stock market? Can anyone? We are in the middle of a nasty market these days. The S&P 500 is down 43% from its peak from 14 months ago. Many stocks are down 50-70% from their respective peaks.
During bear markets many stocks go down a lot more than market for no true fundamental reason. There are plenty of stocks, domestic and foreign, that are down more than their fundamentals justify and that will not go out of business in this cycle (or any cycle in the foreseeable future).
The reason people are scared to buy stocks now is the fear that the stocks they choose go down a lot more from here and it is a reasonable fear but not the best way to make investment decisions. Quite a few market pros think the S&P 500 could go to 600 before this bear is over (I do not). SPX 600 is an unknown, it may happen it may not. What is known is that many stocks are now at much lower prices than they were a year ago or at similar prices to what they were five and ten years ago. Again this is easily knowable by looking at a chart. Not only are many of these names at lower prices some of them are also much cheaper (lower prices as potentially nominal and cheaper in terms of common valuation metrics).
If you know a stock has a much lower price today, has a cheaper valuation today, is unlikely to go out of business and you have some cash it probably makes sense to buy a little now. I'm not saying a bottom is in and I'm not saying get 100% invested right now but if you raised cash, have not bought anything while the S&P 500 has had a 7, 8 or 9 handle and you have not sworn off stocks you'll probably get a price you'll be happy with a few years from now.
But what about the S&P 500 going to 600? From Friday's close 600 would be a 32% drop. Yes that could happen but the probability of a 32% drop after a 43% drop is quite low. The focus here is what is known now versus what is feared for in the future.
18 comments:
I think what you meant to say was "Only Thing We Have to Fear Is Fear Itself"
A relevent Spoke quote;
"After a time, you may find that having is not so pleasing a thing, after all, as wanting. It is not logical, but it is often true."
--Spock in 'Amok Time'
I've bought a little and will keep buying more if the market continues to bottom (fingers crossed.) The issue for me is one of time frame--the stocks that got pasted the most like energy and ag probably won't lead the rebound but are great long-term opportunities. I don't want to load up, then lag on a move up. Your sector weighing approach makes a logical strategy, Spock.
Good blog to start off a Monday. Should get a lot of action starting with me...
I agree with the valuation and stocks being cheaper but I'm looking at it from a deflationary perspective. After Christmas I believe I will see bigger bargains from the retailers and lower stock prices into the 2nd quarter. What if I'm wrong about the market? I may miss part of a rally. If I'm right, less pain.
I believe the market will re-price itself to adjust for the rising PE's. Things are going to get worse before they get better.
I read with interest this morning that Toyota had their first loss in 71 years. Here's a company that does almost everything right like building some of the best cars on the planet. They have high mileage vehicles, arguably the best luxury car (Lexus) since inception, they do everything better than GM, and they build the best quality. AND THEY'RE NOT SELLING CARS!
We all know the consumer is 70& of our GDP. I don't see them getting into the game anytime soon. Hopefully I'm dead wrong and the retailers have a 4th quarter miracle come back with a winning shot at the buzzer.
But if they're not buying Toyota, why are they going to buy domestic? What can GM possibly do other than selling below cost and making it up on the volume!
I have been buying stocks for two months now because my time horizon is more than five years. I do agree, in many cases, that the low price of stocks is not driven by fundamentals, it's mostly fear and we do have a window now as a buying opportunity. I also believe that this recession isn't going to last as long as some think.
I see the out-of-market issue as a trust issue. The public has been L.. to, mis-lead, used, whatever word you wish, but we arrive at the same place, public dis-TRUST.
Until a period of time passes were there is consistency in what Gov't, big business think, say & do, I would expect many people to stay with capital preservation.
I think we all know a number of people who had / have their investments in some fund that has dropped over 20+%, being conservative. Many need to change their spending plans for the future. Many just want to protect what remains.
I am in, but mostly in cash. I have been doing OK recently in financial, tech, staples, health care by choosing low debt/equity, cash flow companies with management I think I can trust. I took some cash out early last week and I am looking to add back to my positions soon.
Richard
"Until a period of time passes were there is consistency in what Gov't, big business think, say & do" is a silly thing to wait for, since it does not happen.
Have you read this?
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3870089/Protectionist-dominoes-are-beginning-to-tumble-across-the-world.html
Sounds like Richard has the right idea. I have some of the type of stocks he's talking about with a large cash position also.
But I'm a worry wart and I continue to hang my hat on the consumer's ills. I believe rising unemployment, shrinking realty values and lack of credit will trump lower prices and low or no inflation.
For those who may have missed El-Erian on CNBC this morning, here are a few of his comments and they're all quotes...
We are on a bumpy journey to a new destination.
Multiple bottoms in 2009.
Global economy continues to weaken.
Returning to business as usual is unrealistic.
There is disarray in the capital markets.
Stay diversified and watch your risk management.
And lastly...
Don't chase attractive valuation from historical perspective.
I agree with James. E comments on the auto industry. The USA big 3 are not competitive in the USA. Doing OK in Europe, South America,and maybe Asia but not USA.
Did you read were GM has recently, last 3 years, put $billions into their plants in Mexico? Why, labor costs are lower.
We need to get honest with ourselves on cost of heavy industry products and American jobs. We, the world are not willing to pay the American worker what they want in wages and benefits for building automobiles and many other manual or semi-manual labor products. Why has our Gov't (business) drugged their feet and put little if any any political or financial pressure on Mexico to help solve the border illegal immigrant worker issue? USA business wants low cost labor.
Example. My neighbors son recently had a book published on photography of our Great Plains. I spent several hours with the book and then looked at where the book was published. Publisher is in Wisconsin. A little further down - printed in China. Book sells for $29.95 average price for new book today. How much would this book cost if it were printed in USA? How many printer jobs have gone away? Does publisher want to much profit?
My wish is for everyone of our kids to develop their mind and become an expert in the field of their choosing, to be among the best and the brightest. I don't think the American can win/succeed if they choose to compete with their back and not their mind.
I think I would support a carefully thought out family educational financial and public support program that does not discriminate. I dislike the idea of paying families to actively support the child's education, but immediate access to money usually gets people attention. The alternately is to intercede on the child's behalf and I would rather not go there but I would if teachers see a child who demonstrates the ability to learn but is struggling due to lack of external support, family, tutoring, etc. This is not their problem it is our problem if we wish to minimize our future social cost. So, invest in education. I will.
Richard
glad to see some of you having fun with the Spock reference.
Here is the link to the depressing article in the Telegraph.
FWIW we have two Toyotas.
I like this Richard guy. Education has always been the key. Most of the ills of this country and of the world are due to ignorance.
There are too many children who don't have a chance unless they're so talented that they can rise above their environment. Not many of those and mentoring is almost a dead word.
No child left behind? Not in our time.
FWIW, we have 2 foreign cars.
I have a Dodge and a Chevy. I think of them as being American cars, but I wonder what percentage of the cars' components are American? If that percentage is less than 100% (which I am sure it is), are they really American cars?
JCarr
Spock would try to find Camelot.
http://uk.youtube.com/watch?v=luVjkTEIoJc
Or maybe not.........
Well, I guess Spock doesn't believe in Santa Claus rallies. What's so illogical about reindeer that fly, anyway?
Would Spock find this logical?
http://www.financialsense.com/Market/wrapup.htm
As for the Christmas rally, I suppose that since the market was down a lot in '08 that many investors will take the opportunity to sell off some losers for tax purposes before the end of the year. And there were a lot of losers out there this year.
Probability of an additional drop? Whose to know? Comparing it to all bear markets, the probability might be low. Comparing it to the only two bear markets that resulted in a credit unwind similar to ours (LTIC was just a blip!), Japan and 1932, would yield a less sanguine conclusion.
LTIC==on a secret decoder ring=LTCM
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