CORRECTION: There was an error printed in the forecast for the S&P500 Index in this entry. The change has been made to reflect this commentator's forecast of October 10.
A reasonable person - investor or otherwise - might define "bargain" as something that can be purchased at a below-market, or below-true value, price. I suppose you could define bargain in other ways. But these definitions seem to apply to things like stocks and real estate. So I'll stick with them.
In order to identify a bargain, you need to be able to relate its price to some historic norm or, on a more speculative scale, to a reasonable expectation of future value based on performance. Herein lies the problem with the argument for bargain-hunting.
Although this commentator was recently quoted in a print media outlet as "a former stockbroker," most of my career in the investment arena was spent as a securities analyst, portfolio manager, and research director. Be that as it may, as investor attempt to find their way, with most serious investors likely keeping most of their cash on the sidelines, many market pundits and manager/advisor wannabe's are simply perplexed.
Lately, as I observe all of the financial media via print, television, Internet outlets, and investment firms, there is talk mainly regarding two schools of thought - bargains and volatility.
BARGAINS:
A reasonable person - investor or otherwise - might define "bargain" as something that can be purchased at a below-market, or below-true value, price. I suppose you could define bargain in other ways. But these definitions seem to apply to things like stocks and real estate. So I'll stick with them.
In order to identify a bargain, you need to be able to relate its price to some historic norm or, on a more speculative scale, to a reasonable expectation of future value based on performance. Herein lies the problem with the argument for bargain-hunting.
How reliable are forecasts for future earnings? Sure, if you are that now rare "buy and hold" long-term, ten-year investor, you might be able to throw darts. However, if you're more focused on one, two, three, even five-year horizons, can you truly forecast, with any accuracy, earnings for many companies? And if you can, what value do you place on those earnings? In the face of a severe recession, how accurate can corporate CEOs really be when discussing future prospects with analysts?
I know, some readers may be thinking that I am beating the proverbial dead horse. But as you watch the incredible market volatility, particularly in light of the observation that quite "suddenly" market professionals have only just begun to consider the makeup of the current recession - it's depth and length - you just have to wonder what people are thinking, and who's best interests they have at heart, when they suggest that the stock market is at or near a bottom.
VOLATILITY
The other day, a number of supposed investment professionals were quoted in our daily newspaper regarding volatility:
"I don't believe this volatility is the real norm..."
"Volatility will persist..."
"The current volatility level has to do with the unique circumstances of the global credit crisis and the bottoming of the bear market."
"It is not uncommon for volatility to increase for prolonged periods."
"Definitely abnormal, but tumultuous times bring volatile markets."
"Unfortunately market volatility is here to stay for a while."
"For now we will continue to see wild swings in either direction."
Oh my! And these folks are actually paid to manage billions of our dollars? Golly gee! The market is volatile. Yep.
BACK TO THE FUTURE?
On October 10, I suggested that this stock market might not see a bottom until around 7,200 on the DJIA and 700 on the S&P500 Index. This morning, the stock market has, so far, hit an intraday low of about 8,200 and 853, respectively. We can be looking at further declines of 12 percent plus in the much-watched averages. Some stocks will decline more, some less, of course.
But this bear is not finished growling.
This morning, OPEC announced "their intention" to cut oil production by 1.5 million barrels a day. That's more than "Sister Sarah" and other oil industry "experts" believe can be pumped from ANWR ten years hence! It's a pretty big cut, even given collapsing near-term demand for oil.
I keep harkening back to the recession of 1973-76 and THAT stock market decline. We are in the midst of the biggest market collapse since at least that period, and perhaps yes, since the 1930s.
The following questions do not yet have clear answers:
How high will employment reach?
How much will gross domestic product (GDP) decline? And for how long?
When the dust clears, will there be a U.S. auto industry? And if not, how startling will be the ripple effects throughout the economy? Under Clinton (yes) and Bush trade policies, we have shipped a huge portion of our basic manufacturing capacity for goods overseas, perhaps not to return...ever. We could yet see several million more Americans out of work, and perhaps one or two million is a low number.
Will declining energy prices once again dent our will to switch to alternative fuel sources?
When will inflation finally rear its ugly head? While it is imperative for interest rates to continue to decline internationally in order to try to mitigate the recession, the end result of such declines is often inflation. And that will again result in much higher interest rates - bad for home buyers, for credit card holders, for the bond market, for equities, for everyone.
Despite OPEC's decision to cut production, the price of crude oil has plummeted. This morning, it broke $63 a barrel, down 57 percent from its peak. This is good news for consumers of energy, bad news for producers, bad news for developers of alternatives, possibly fatal news for General Motors and the development of the Chevy Volt electric plug-in.
Gold continues its march lower, suggesting that inflation is not yet seen as a problem, but rather deflation. And the evidence is all around us.
I must say, at the same time all this volatility and horrible economic news is before us, circumstances have created potentially great "bargains" in equities - assuming that you can see an end to the current recession and your investment horizon is long enough. Baby Boomers perhaps cannot see ten years down the road as an investment horizon for equities. At some point, especially after they evaluate their third quarter 401(k) and other retirement plan statements, they will (we will) at least gradually shift to less volatile investments. This will create less demand, perhaps for equities.
As suggested in earlier posts, this commentator has tip-toed back into the market during this recent leg of the bear. But 75-80-percent cash still feels pretty good to me. No one catches bottoms, well most professionals don't. Sure, we can all agree that bear markets bottom before recessions end. But when will this recession end? It is not like any recession that we've experienced in some time. And virtually no one that is managing money right now, hundreds of billions of dollars of investment portfolios, was around the stock market in the early '70s, let alone the 1930s. No, I wasn't around for the 1930s either. But I didn't learn about the investment climate of the 1960s and '70s through text books and lectures during my MBA years, either, I lived them. "B school" didn't teach me anything about effective investment management despite my investment in the degree. I simply had to get my hands dirty.
Today, we have a system of portfolio managers and securities analysts that too often landed in their positions simply because they "went to school." Think about that next time you open up your reports from your mutual funds and retirement plans. These folks often rely on other analysts, or equally bad, what self-serving CEOs of corporations tell them. They see trees, but not the forest. They follow unsustainable trends. They "go with the flow" and explode with the bubbles.
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