Fear in the Market - Time to Buy

The smell of fear is in the market. The babies are being thrown out with the bath water.

At times like these it is easy to make emotional, irrational decisions. It is a time when one should stretch to buy all one can but one feels like one is trying to catch falling knives. To make the big money on the way up, one has to be willing to hold on during the tough times.

All the great investors tell the story that the time to buy is when there is "fear in the market", "blood in the streets", "capitulation in the air". That is where we are today. The media talks and talks about the sub prime housing market. The fact is that the total loss in the housing market will be a small number. More people are able to afford a second home today than ever before in history. The demographics are compelling. There are more people at prime age to buy a second home than ever before in history. Ironically, the real problem is that the world economy is a little too strong for its own good. With the world economy strong, even Japan, which is filled with old people, is growing again. This growth means that 1% loans are going the way of the dodo bird. As speculators around the globe are searching far and wide to raise cash to pay back prior loans made, they punish one asset class after another. Smart money is holding in even though no one can say how long this repricing will last. When it is all said and done, the deep bottoms made in many a stock will not even be noticeable on a long term chart. Remember, only long term investors make money, traders generally lose.

No, I did not believe this mid cycle correction would be so tough. I was wrong. The time to tell me I was wrong was many months ago. My family accounts have taken major hits because they are highly levered. I don't mind the wild roller coaster ride because our accounts are for the long haul. Of course, I would love to be in only during the climb but, all the people I have know who truly are out during declines of this type are also out for most of the up moves.

Again, the vast majority of investors do not understand that the sub prime mess is being over hyped. Most do not understand that the really big move is in the delivering of the carry trade. One does not need to understand these details to know that one should buy more when prices are low, or at least hold on to what you have. Indeed, the time to add to riskier positions is after a major down turn. The riskier positions have fallen the most but the ones that survive will give off incredible returns on the way up.

The hurricane headed into the gulf is very old news. Every year there are hurricanes. During normal times, the billions of dollars of market moves are not determined by a relatively minor investment risk. Sure, Katrina was a very expensive storm, however, in the grand scheme of the total oil market, it had an effect on a relatively small portion of total production.

Again, the irony is that the prospect of higher interest rates in Japan is a sign that commodity prices will ultimately decline and that the economy is strong enough to handle the sub prime mess and then some. The one thing that commodity prices hate is high real interest rates. Back when real interest rates were low, it made sense to hold gold. Gold gives off no income but if the price of real money is negative then gold appreciates in relative terms. Norway followed through with an interest rate increase today. Yes, finally central bankers have rates at levels where they hurt speculators. Are you a speculator or an American Investor?

In personal accounts, I have sold some of my winners to buy more of my favorite stock. When the turn comes, I expect to enjoy a great ride. I hope you will ride the Ken Fisher bucking bronco with me. People like Rothschild, Getty and Baruch made so much money during panics that they were able to make a lasting difference in the world. Baruch made so much that he basically under-wrote the US State Department in his latter years. The great-great grandson of Rothschild was in the news not too long ago.

No we cannot all be Rothschilds but we can have enough common sense to keep our heads when others are losing theirs. Be calm my friends. There have been hundreds of market situations worse than this one in the past 50 years. The FOMC still has a loaded six gun. It raised short interest rates 17 times to reach 5.25%. If necessary, rates can quickly be dropped and the strength in the Yen can be short circuited with no notice!

Comments

[NI123]

The difference is that people like Rothschild, Getty, and Baruch either engineered the falls which they profited from or were 'in the know' and saw them coming - Which you, admittedly, are not and did not. Do you truly understand the breadth of the subprime, and now, the Alt-A meltdown? Do you? Have you seen the Credit Suisse ARM reset chart, which indicates we have not even reached the top of the subprime ARM resets, and won't for at least another 4-6 months (And Alt-A's won't top out for another two years)? Have you seen the Shiller used home price index, which obviously indicates a housing bubble of mammoth proportions, the likes of which the US hasn't seen in the last 120 years? Have you seen this information? I have, and objectively speaking, I don't think we are anywhere near a bottom. The financials may have gotten a short term breather from the FED's liquidity infusion, but long term, the consumer is going to take the US economy into a place which has not been seen for 5 years or more... The end is not here.... Yet. Google is your friend... Make use of it.

[keith]

Robert Bohrer- I agree with the housing bubble reset of mortgages, but I think you under estimate the power of the FED. As we continue to roll through this reset, what if the FED has dropped the discount rate by 1%-3%? If you take a look at the economic numbers via GDP post 9/11, it was a very shollow economic recession. The market pull back really hurt those on wall street not main street. Further more, I agree that the housing issue will hurt main street, as well as Wall Street on this round. However, the bedrock of the US economy is a bit more solid than you give it credit for (couldn't help the credit bit). I just don't see a 29' type situation developing here.

[ticket_deals]

If the Fed lowers rates, that will strengthen the Yen not weaken it thus causing further carry trade unwinding.

[NO DooDahs]

WOW. A "fear in the market" post inspiring three consecutive fearful comments. LOL

[NO DooDahs]

Correction, two fearful comments. Sorry, Keith.

[LOD]

i disagree with your thinking that more people can afford a 2nd home today than ever before.

the lax standards cannibalized future home buyers many of whom couldn't afford to buy a home and shouldn't have in the first place. Valuations are also out of whack in many places in the US (in terms of rent/mortgage ratio) and according to John Burns (realestateconsulting.c...) the national home
price should fall 6% to acheive a fair value.

I think there's more blood to see in lending/home building.