Selling Over? I'm Just Not Buying It.

The Hong King market was up more than 10% Wednesday morning, while Japan and China bounced back two and three percent, respectively. As washouts go, this one has been remarkably short - if you believe it’s over, that is.

There was almost a jingoistic component to Tuesday’s TV media coverage, that is not dissimilar to the way people reacted to the first day of the stock market opening post September 11th. Remember the “buy a share in America” concept? If every American bought just $100 of stock, the Dow would open higher on that first trading day after the extended close that had taken place. “Don’t let the terrorists win.” Folks who bought stock that day may have felt proud, but paper losses were their reward.

When the U.S. Federal Reserve announced its 0.75% rate cut on Tuesday at 8:30 a.m. EST, the U.S. markets turned around almost immediately. You all saw that. What was to be a 500-point down day turned into a mild 128 point drop. Over the course of the trading day, one talking head after another was interviewed on CNBC, serving to be a fabulous group therapy session:

The markets look out 6 to 9 months, and things don’t look so bad that far out.

People will start looking at the retailers at these levels.

The financials have driven this correction, so it is great to see them lead this recovery.

CNBC’s myth #1 on Tuesday was that the “markets look out 6 to 9 months.” That “9-month” idea is a new one to me, as the cliche, or truism, has always been that the markets try to look out “6 months” at things such as the economy and future earnings power of key listed companies. It seemed to me that the commentator who through the nine month concept out there just wasn’t all that sure about how the world will look in 6 months, and seemed to be buying himself some time. Or perhaps he lacked conviction, something that one needs to have to go headfirst back into the market (See my prior post “Just sit tight - unless you’ve got the chance to raise capital” January 22-08.)

If the reason why the Asian, European and Canadian markets were being crushed was due to near term concerns about the U.S. economy, who believes that a deep rate cut at this stage is going to avert a U.S. recession, if one was on track to happen/is already happening?

The Fed’s move was brilliant in as much as it avoided the risk of a huge selloff, with all the confidence-shattering impact that could have had. But the idea that U.S. retailing stocks are suddenly a good investment is a bit far-fetched.

But that’s what Jim Cramer was calling for, and many of them, such as Saks (SKS) traded well Tuesday. But over the past 12 months, firms such as American Eagle (AEO), Ann Taylor (ANN) and Collective Brands (PSS) are down more than 40%. Calling Tuesday “the bottom” takes a unique ability to read an economy, particularly one that still suffers from a remarkably untransparent banking system.

The data I’m paying attention to is this:

The Philadelphia Fed reported Tuesday (pdf) that the economy shrunk in 23 states last month, including Ohio, Missouri and Arizona, and was stagnant in seven others. California and Florida, with their plunging home values, may soon join the recession list.

If key U.S. economic states have just started to weaken, will Tuesday’s rate cut be enough to turn that around, and fix the housing slowdown in one fell swoop, avoiding a recession?

I doubt it, but what do I know? The Fed Chairman himself has had a hard time guessing correctly. In the meantime, entrepreneurs shouldn’t be laying out their 2008 business plan on the basis that fears about the economy are behind us. As for the stock market, investment bankers need to be honest with their prospective clients that the equity markets are shut right now, and there’s no predicting when they’ll open again for small capitalization stories.

If you have the chance to raise capital, and you need it to grow your business, then pull the trigger.

If the recession never comes, you’ll have the growth capital you need to take advantage of the opportunities that may present themselves. If the recession does come, whether it is meek or not, you’ll be delighted that you are not trying to stitch a deal together in the teeth of a weak economy, where every 2009 business forecast will be doubted.

The “telecom winter” took over four years to thaw before carriers started spending again in earnest. The NASDAQ took years to bounce back from 1300 to 2000. How can this all be over so soon, before we even know if the recession isn’t going to come to pass?

Even the world’s largest funds are having a hard time getting this right: The Abu Dhabi Investment Authority put $7.5 billion into Citigroup (C) using a structure that coverts at $31.83/share, albeit with a handsome 11% yield. At the time the deal closed in December, Citi was trading at $33, and on Tuesday, Citigroup shares closed at $24.41.

If people who invest billions into companies can see paper losses that fast, imagine how the VC and merchant banking market will treat financial forecasts over the next few quarters - recession or no recession.

Comments

[ZB]

Oh, I think you mean jingo instead of gingo. Nobody's perfect.
Signed, your friendly copyeditor.

[john1]

Perhaps you are discounting American optimism and stupidity a bit too much. If there's a sucker born every minute, there appears to be an overwelming number of them born in the USA. What happens if the peasants keep spending and banks keep lending. The mania could go on FOREVER dudes.. (like totally, dude, what can happen. I'll borrow from my 401k and buy me a new JetSki, dude. Like totally)

[GregoryY]

I love this talk about collapsing home prices in CA in FL. Where is this bull comes from? With 90% of CA RE located in the areas, price collapse in Stockton and such is merely a statistical blip. Prices in Bay area and even in San Diego are still within 5% of the top.

[erx]

My2c - ???

Not sure where around the SF Bay you're talking about, but in my area list prices are already 20-30% down from the top. And no one is buying at these levels...

[DavidSchrader]

Guess what folks.... nobody really has a grasp on the extent of these economic issues. The only real question to ask is this: where is the current risk/reward worse? Is it in being net long and seeing a serious and rapid decline in asset valuations OR in being net short/in cash and seeing a rapid increase in asset valuations? What's been happening when the headlines are positive and how about when negative?

If you choose to examine this on your own, you'll find out the answer on how the market is feeling on a day to day basis. That recovery the other day, in my opinion, should not be fully credited to the 75bp cut but instead to market participants who realized that there was no legitimate reason, at that point in time, for such a rapid and significant market decline. Therefore they went long ASAP to punish the sellers for their overreaction. Don't be fooled into thinking those 75bp are going to change anything significant in the short term.

A wound is still a wound if you bandage it up. Time and internal healing processes are the only things that can mend it - neither of which have occurred as of yet.

[jcrash]

Well, home prices are UP here in Oklahoma. Employment is fine, cities are growing quickly.

I don't think people are getting foreclosed on or missing payments on loans. Home sales were down 5% year over year, but previous year was alltime record and we had huge ice storm in December, so no concerns, basically growing faster than ever.

If that is what it is like here, I hardly think we have a global recession occuring due to a US problem which can't even affect my state.

[Robe]

Swings of the market pendelum to the plus and minus are part of any economy. What I find lacking is some accountability in getting the write-downs communicated in a transparent way so the markets can constructively move forward. I believe the reason that accountability is not being forced by federal agencies is there's a concern that if we "flushed it all out" at once, it (being larger than we think) would panic the markets. So we continue to list in the seas of vaguery. The question we need answered transparently is this: Are the media overweighting the influence of a 150 Billion clog in a multi-trillion economy, or, like the arteries of the heart, are those small percentages in system size nevertheless essential to the survival of the whole system. Time will tell what federal agencies won't. Until then, the markets will remain unstable.

[Ryan Freund]

Does it really matter if the selling is over or not? Why not just buy companies that have economic moats and are fairly priced. Warren Buffett is having a field day in Railroads, Water, and Building Materials. Smart money follows him, in my opinion.

Regards,
Ryan Freund
freundinvesting.com

[MSmailbox]

My decision to go long, in healthcare and global IT outsourcing, was made prior to the 3/4 point rate cut. I have no idea, whether interest rates will help or hurt my investments, so I am ignoring them. My research is not based on what the Fed says, or does, nor do I participate in the mortgage/financial sectors. I ignore the headlines, but I do read the stories, keeping in mind what my original conviction, was based on... Months of research, on the industries and very specific companies, which are getting their acts together, within those industries. This is not the "end-of-the-world... I read the Bible, to prepare myself for that eventuality... I read lots of things in order to enrich myself, in the mean time... Why would an event, which renders money as meaningless, affect my investments? Preparing for Judgement Day, most certainly affects how I behave and renders me to become an honest and more caring individual, but I don't get buy or sell signals, directly from scripture. The sky is still blue and I'm long, right now, because this is not a global recession!

[Gob]

The number one rule of market prognostication is that anyone who uses the word "jingoistic" is an unmitigated douchebag.

[NoFate]

Bush is going to sign into law a economic stimulus package that helps POOR PEOPLE! Admit it ...we got serious problems people!