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Tuesday, September 30, 2008

The other side


In 2005, there were some basic psychological truisms that contributed to the excess that we see being unwound now. Real estate prices always go up over the long-term – and these prices are moving up quickly! Get in! You can buy a house with practically no money down because credit is easy to come by. It seemed every corner of Manhattan had a brand spanking new bank branch opening. Blue skies, baby.

These conditions have reverted to the opposite end of the spectrum. Real estate prices are now perceived to be in perpetual freefall with no visible end in sight. Credit has been utterly retracted. The American dream of unending prosperity has suddenly become a nightmare of years of contraction. Banks are being seized by the FDIC and forced into life-saving transactions by the Federal Reserve. The bubble has become a smoking crater.

Credit is a contract of confidence between two parties. One believes the other will pay them back at a profit and therefore money is loaned. Currently, confidence has been withdrawn – banks and brokers fear loaning money to one another and to individuals. Banks are selling out to avert cataclysm. The system is frozen.

Bush, Paulson and Bernanke told us if the bailout bill doesn't pass, there will be panic in the streets. And so there was. The indexes plunged yesterday. The VIX, a measure of volatility that is often used to gauge levels of fear in the market, exploded to levels typically seen before major market bottoms.

Most of the managers I speak to are sidelined here. There's too much uncertainty. I have spoken with friends who are hoarding cash. I joke about canned food and shotguns and laugh nervously. If I think too much, I worry about civil unrest, about how truly unfair this seems to the average citizen.

It seems a foregone conclusion that this quarter is going to suck. Confidence is gone. Spending is being cutback everywhere. New projects are on hold. There's little reason to think it will turn around any time soon. However, this looks like shock to me. It will not stay this bad indefinitely. Business will certainly not return to prior levels of health, but we won't stay this conservative either.

I see a lot of stocks that might be bargains if the dust settles. I see a lot of analyst capitulation. I do not see any upgrades at all really. Charts are breaking levels that would have seen ridiculous only a few short months ago. The stage is set for a bottom, though I can't tell you what would make others believe that.

No one is invested. If psychology changed, the gap up would be ferocious. I have no idea what would cause that to happen. I can tell you that I am afraid to have a lot of shorts on as buying them back when things look better will be extremely difficult.

I do not like crowds and there's a veritable stampede of bears running by my window to the market, dropping valuables as if a storm will pass behind them and wipe out all that remains. I'm tempted to go out and grab some of the stuff lying in the street.


drfinn said...

Have a guess how long the economy takes to come back? Might take a year or two, but once the economy gets back on sure footing I don't see how Crude and energy companies doesn't rocket higher. Its not time to buy yet, no reason to be first in when the move up will be a long one.

Roy Howard said...

As usual, I would think the market bottoms long before the economy does.

I don't know where or when the economy will bottom. I would speculate it's going to head lower for some time to come. I would also assume growth will be slower -- and that's what the market is really factoring in here -- a much lower multiple. The question to me is where the new leadership will be. It's unlikely it will be where its been. That's rarely how it works.

Defensive stocks are likely to continue to outperform for the time being.

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