There is a lot of bad news affecting the stock market and prices are falling for some very important reasons. These include reduced expectations for earnings, higher unemployment, a lack of liquidity, a housing market that has not bottomed yet, federal spending gone wild, and the collapse of some venerable financial institutions to name a select few.
The Standard & Poor's 500 Index: started the year (Dec 28, 2007) at 1,478.49 and as of Friday October 3 it was 1,099.23, down 25.7%.
There are concerns about recession and even a depression and the global market for most commodities has softened.
Given all this how can I believe that the market is becoming irrational to the downside and values abound?
For one reason I know that many people are selling stocks out of fear of the market going lower and they do not want to be the last one out of the pool. That is a legitimate reason to sell but has nothing to do with the intrinsic value of a company or stock. If the index is being sold off then that means the good are being sold along with the bad.
Another factor pressuring the market relates directly to tight liquidity. I recently refinanced my home and the bank wanted me to reduce my home equity line to comply with its much tighter lending requirements. I sold some stock to accommodate them but this had nothing to do with stock valuations. I also sold some stocks and funds to buy down a commercial real estate loan in the past month. I had no pressure to do so because the loan to value is very low, but we are looking to acquire additional property as distress sales turn up and want to keep our powder dry.
Many people have been allowing their credit card debts to increase but facing little hope of growth in the stock market; those that can are selling stocks to buy down their debts where they can. This too has nothing to do with the intrinsic value of the stocks they are selling.
Almost all companies are finding the credit markets are tightening to the degree that business loans for operations are restrained, so they are selling stock to become more liquid.
There are a multitude of reasons for the selling that do not relate to the actual stock valuations but here is a big one that many people have implied in their comments to me. Since they believe that stocks are headed lower they might as well sell now and buy later. Again, this is an example of gamesmanship and not intrinsic value.
'My pal Warren' has been buying stocks lately and has made big investments in Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE). In both cases he negotiated very favorable deals privately that were not available to you and me. Some have commented that his deals were so favorable that one should not use that to call the market bottom. To those people I would respond, true, however, Buffett could just as easily have made the same deals next month if he thought the market was going to deteriorate much further.
So I happen to think there are many values out there. You do have to be selective, but I do not share the fear that most have been expressing. While I do think the economy will be a Spartan one for the foreseeable future I am convinced the best buys will be during that period of highest fear -- as usual.
Worth a gander:
- Serious Money: Stable stocks beating S&P 500 - CB, DIS, JNJ, TEVA & XEL
Chasing Value: General Electric is screaming to me! - Chasing Value: Southern Company is somewhere to hide
- Chasing Value: Considering Berkshire Hathaway... again
- Chasing Value: Financial devastation? Still up but less
Happy holidays! Google giving away free Wi-Fi 
Dr. Doom Nouriel Roubini believes the bubble is about to burst
Cramer on BloggingStocks: Investors are rethinking their snap judgments 
Reader Comments (Page 1 of 1)
10-06-2008 @ 2:58PM
Stock said...
In my opinion people don't need to panic on the Stock Market right now. In the Long-term run, the us stock market will become much better. Please look back the History of the Stock Market crash you will understand what I mean. On the other hand, it is a real opportunity to buy stock right now... to learn more just go to http://stockpreacher.com
10-06-2008 @ 3:04PM
Grouchy said...
VOTE THEM ALL OUT IN NOVEMBER. LET US HAVE SOME NEWBIES AS IT DOES TAKE AT LEAST A YEAR FOR THEM TO BE BOUGHT...AND MAYBE DURING THIS TIME, WE CAN GET SOME LEGISLATION THAT WILL REGULATE:BAILING OUT THIEVES IN THE SUBPRIME DEBACLE, DOMESTIC DRILLING ALLOWED, STOP THE GREEDY SPECULATOR TRADING OF A WORLD NECESSITY, CREATE VEHICLES THAT ARE ENERGY EFFICIENT AND GET THE DAMN PEACE STARTED IN THE MIDDLE EAST! TIME FOR A CHANGE FOLKS AND WE ARE THE ONLY ONES THAT CAN DO IT AT THE BALLOT BOX...... LEAVE YOUR PARTY HAT HOME
10-06-2008 @ 4:14PM
Brad Nixon said...
It does not matter what happens in the stock market or the presidential race.
We need to realize what is truly important, food, clothes and, shelter. Our communities need to shrink to that of villas where we get the majority of what we need to live from items produced within a gallons worth of gas driving distance. I am talking serious life changing actions that change how we as a race of people need to instill in order to survive.
10-06-2008 @ 4:48PM
william lindblad said...
Hmm! Good points and bad points to the general mess. Yes, there will be buys, but they will require due care and one should expect them to be long term. This is no place for day trading. It's and old battle, akin to good and evil but in this case it is fear and greed. Unlike the former, greed always wins! It does have drawbacks as are evidenced in the present time - when one factor gains too much ground it can abruptly change it's energy into the opposite. Sort of like a pool game and the action of the cue ball.
Buffet has also stated that this "will be an economic Pearl Harbor". While he said it, he did not explain it and the statement can be taken in more than one way.
Personally, I have been down the rocky road before and have taken all steps to avoid a repeat. No rent, no mortgage, no water bill. Taxes and insurance only. Reduce debt, reduce cost, get it down to the basics, but live good. If the current situation continues, a pay as you go mentality may be prudent. I don't know what is coming but I am too old for experiments.
I fully expect that the turmoil is far from over and has to yet to encompass Asia. I expect that there will substantial interest rate rises and inflation ahead, along with a stagnant economy. I expect oil to regain strength, before it makes retail level. That is the big problem as it has dropped significantly at wholesale
but will not drop at retail for months - where it counts.
All we can do is hold our breath and hope for the best.
10-06-2008 @ 10:36PM
Mr. noitall said...
Value is a term we should all think about, it's something that changes based on a number of factors that are constantly changing. It's can't be measured easily, I think too often we try to treat economics like a science, it's not a science. Trying to determine the value of a company's stock, a commodity, or a currency, involves some spectulation.
One other reason why people are selling, how about anger. After years of reading about the huge salaries and bonuses Wall Street geniuses were collecting, only to find out now that they were only creating an illusion.... well I think some are angry about that and don't want to keep on paying people that have, let's say, robbed them.
10-07-2008 @ 10:59AM
getsmart said...
Don't make the same mistakes again. Knowing when to sell stocks is as important as knowing when to buy. A new site called smartstops.net was just written about in Kiplinger's. Gives alerts when stocks show signs of falling hard.
10-10-2008 @ 1:14PM
Manhar L. Shah said...
It appears that there is no solution to this crisis. I can think one- First the IRS should tax (extra over existing) on short term gain like this- If you make gains in one month you pay 90% of the gain. This will decrease to 0% gradually in say 12-24 months. This will suspend all speculations and gyrations in prices. Now any one gets out of market cannot come back and rip quick profit by selling it next mont or in few months. Investment is for long term and the way things are going is like casinos.
Manhar L. Shah