Daily Investment Interpretations
January 25, 2009
seems to be a growing consensus that the U. S. economy will bottom somewhere
around the middle of the year and will then turn back up This will be the
normal delayed response to the government's massive infusions of money into the
economy. Unemployment will continue to rise and there will continue to be very
bad economic news, but GDP will level out around the middle of the year and
start to improve in the latter half of the year. As for the stock market, it hit
a low in October with the VIX spiking to 96, dropping to 44 on November 4,
peaking at 81 when the S&P touched 748, and then working its way down to the
40's and 50's. Then from the first of December, the VIX marched steadily
downward to a low of 37 on Friday, January 2 (while the markets were still in a
holiday state). From there, it climbed to a high of 57 on January 20, falling
last Friday, December 23rd to 47. This decline in the VIX, coupled with a
damping of the wild swings that characterized the indices throughout October,
November, and the first week in December, have pointed toward a stabilizing
market. Although the S&P 500 hit a low of 805 on January 20th, it didn't
reach its November 20th low of 740. Meanwhile, the news is truly bad, and from a
contrarian point of view, that's a truly good thing.
An interesting fact about this popular outlook is that it seems to me to be approaching a consensus point of view. And from a contrarian standpoint, that's a bearish sign. For several months, the banking crisis seemed to have passed. Now it seems to me to be entering its second leg. There appears to me to be a deathwatch forming for the Bank of America. One Morningstar treatment of the banking industry concluded that U. S. Banking can end in either of two ways: nationalization of leading U. S. banks or a "bad" bank that would take troubled assets off the books of U. S. banks. One problem with nationalization, apart from the fact that it's unpopular in the U. S., is the fact that there are about 8,000 U. S. banks. The government couldn't manage all of them or even a small fraction of them. The "bad" bank concept has its own problems.
My concern isn't that the market will go lower, but that it could be several years before the market really comes back, or that it could conceivably get so bad that we would need our investment money to cover taxes, utilities, food, and other living expenses. In the fall of 2007 through August, 2008, I followed the expert advice of Mark Hulbert's market timers who had done the best in the past. I lost several hundred thousand dollars that way. All my experience with financial experts in the past has been similar. There may be experts who can make accurate calls 90% of the time, but if so, their services are probably available only to a select group billionaires. (That kind of advice wouldn't work if more than a few investors knew about it.) What we're now experiencing is a once-in-a-century event. In all likelihood, no 1920's investor who went through this in 1929 is still alive. I'm not sure that anyone currently advising the public has any experience with the kind of beast we're currently facing. In the meantime, the mutual-fund annual reports I'm receiving point to major values in the market, and the wisdom of buying when stocks of great companies (like GE, Citigroup, Bank of America, and Ford) are this dort-cheap. And I'm willing to bet that that financial gurus were saying that about stock prices were saying that in January, 1931.
In the meantime, I think caution is warranted. (To be continued.)