Buying in the Crisis

My call over the weekend to start buying brought a flood of email. I'll respond to the most common points.

You really don't grasp how severe this financial crisis is. You and other so-called experts need to wake up to what we're facing here and stop telling people to buy cheap stocks on their way to worthless. Did you notice what Bear Stearns (BSC) went for?

What, you thought buying opportunities came with happy headlines? I agree with Warren Buffett that we should be greedy when others are fearful and fearful when others are greedy. There's a lot of fear on the street these days.

I grasp how severe the crisis is, and I also grasp two other key points: (1) the bad news has been more than sufficiently reported, which is why everybody gets angry when I suggest buying and, (2) cheap is cheap even in a bear market because short-term bear market rallies are among the stock market's most profitable events. My analysis tells me that building positions at current prices will pay off. I don't know how long I'll hold and I don't care right now. I'm staring across a different bridge at the moment.

Finally, yes, I did notice what Bear Stearns went for. I wish I'd been quicker on the phone. I would have paid $2.25 per share for the whole company.

I know I'm supposed to subscribe to your letter to find out your specific buy targets, but could you at least reward a loyal site visitor with a hint as to how you're approaching the financial sector, if at all?

Anytime a sector is as much under the gun as financials are now, it's wiser to buy the basket of stocks instead of a single company stock for precisely the risk that was shown in neon lights last weekend with Bear Stearns. Groups of 100 stocks don't go bankrupt. I suggest using an ETF or mutual fund that focuses on the financial sector. The Kelly Letter bought one Monday.

Do you think the rate cuts will ever help?

Absolutely. Doubts about the Federal Reserve's power are common near the end of a rate cutting cycle when the economy is still disgorging bad news and the stock market has yet to show a hint of recovery. Pay no attention. Rate cuts always take a while to soak in, that lag time is always when critics show up in droves, then the rate cuts start working and the critics fade away. The biggest smiles belong to those who had the courage to buy before the good news began.

Is it too late to buy gold?

Yes. The liquidity created by the Fed's rate reduction campaign will probably begin drying up sometime after summer. It's that accomodative policy that has been the jet fuel behind gold ever since the tech bubble burst. Don't chase yesterday's great contrarian call. Find today's.

Is it too late to buy yen?

Just about. Here in Japan, economists are saying 80 yen will be the bottom for the dollar. I doubt it will go that low, but I think 90 is a good bet. We're at 97 now. It might be worth the trouble to buy some yen quickly to catch the last gasp, but I'd rather just look at ways to buy the cheap dollar as it forms a bottom.

In general, it's better to avoid buying what today's headlines say to buy. Current headlines are banging you over the head with these messages:

Stocks are awful

The dollar is awful

Real estate is awful

Gold is great

Oil is great

Foreign currencies are great

These will flip around in the future, so positioning money accordingly is a fine idea. So fine, in fact, that I'm doing it.

Comments

[ItsJustMe]

Um Jason...on October 22, you encouraged people that it was time to jump in on the slight dip in the bull market. That "slight dip" has now been a 16% drop for the people who took your advice and jumped in.

Yes, you can often make good money buying when other people are afraid but only if that fear is irrational. With the Fed making moves that are totally unprecedented in modern history, it appears that Bernanke is showing quite a bit of fear.

I guess if you think Bernanke is irrational, then it may be time for you to buy...but I'm sitting this rally out...

[phinsuntanning]

Jason, you are a good man, I want you sincere your own bets here, I sold yen today for a modest 10% profit @ 98, not too greedy to wait for 90, you can run the money rain in Aussie money with a good interest rate, not fear enough for me, we saw a lot of ugly times and the US is still expensive. Read Rudy Dornbush currency overshooting theory, he got a nobel price for this, it will help you.

[Purl Gurl]

Jason Kelly writes, in part,

"In general, it's better to avoid buying what today's headlines say to buy."

Under current market conditions following headlines or not following headlines is not a good trading strategy. My experience is chasing after volatility is a good trading strategy for current conditions.

Under better market conditions, for years, I work at trading emerging companies, mostly penny stocks, which exhibit some longer term value. As all know, playing the pennies is high risk trading which affords significant gains, or significant losses.

I never trade big board stocks; too slow, too predictable.

Day trading and shorting are the money makers, today. This is not a trading style which is appropriate for all. This is extreme risk trading. Our current market conditions are testing the metal of traders, are testing the skills of traders. Clearly, a majority of traders are not passing those tests; a lot of money is being lost by almost all and those all are stereotypical naive and gullible online traders new to stock trading.

This is not a time to follow headlines nor a time to listen to talking heads like Cramer. This is not a time for fundamental analysis nor a time to chart technicals. This is a time to play volatility with skill honed by decades of trading experience. This is a time to get in quick and to get out quick. This is a time to buy and sell over one or two days. Holding any given stock for more than a week is begging for losses.

Holding for long term gains, holding for a year, holding for years, is the worst strategy of all. While an investor is waiting for future gains, this money is dead, doing nothing, just sitting there collecting dust. Your money should be constantly churning, constantly working, not simply doing nothing. These market conditions will last a very long time; recovery will be years in the making. This is a dead zone, this is a time your dollars are losing value while not making gains. Each day you money sits doing nothing, you are losing money; dollar devaluation and inflation are slowly eating up your money.

Best position for typical inexperienced online traders is cash and on the sidelines. This is a time for the many to cash out and wait. Actually, this time has past; the many should have cashed out last summer while the getting was good. Cash is not the best position, you are losing money to lessening value of the dollar and to inflation, but you are not risking losses through market crashing. This is a time the inexperienced should be investing time into learning how to effectively and successfully trade stocks during challenging circumstances.

Today's market conditions are a naive online trader's nightmare.

Today's market conditions are an experienced day trader's dream come true.


Okpulot Taha
Choctaw Nation

[Malkiel]

While buying now would not be a wrong idea for the very long term, there's a lot of risk on account of situations like Bear where the writing wasn't on the wall of publicly available information, or of long-term risk imposed by dollar devaluation (even companies that make corn flakes can't prosper when corn prices are skyrocketing).

I'm of the firm conviction that the only catalysts for improvement out there are good April real estate sales, or, if that fails, then the November election. If real estate sales disappoint then I firmly believe we'll see a downleg that offers even better "discounts" this Summer. Until then, cash is trash, so your best investment is probably in material goods you were going to buy anyway, like a new car or an lcd tv...

[locke]

Purl: "Holding for long term gains, holding for a year, holding for years, is the worst strategy of all"

My dividend portfolio would like to inform you that you're wrong.

[tradersystemguru]

Sounds like you should go on Cramer's Mad Money show. Were you also advising people last week when Bear Stearns was trading at $60 that it was silly to sell?

Like many eternally optimistic financial pundits, you appear to advocate to buy when there is blood in the streets. The only problem is that in a true bear market, the blood begins to flow years before the market bottoms. Like those who started buying homebuilders last year when they began to bleed red ink, those who took this action added their own blood to the mix.

You said in your Oct 15 contribution seekingalpha.com/artic... that you had changed your outlook too bullish and chided calls for a recession and forecasts by folks like Marc Faber. Interesting that that was the peak in the S&P500 which has fallen 15% since. The Nasdaq is down 19% since then.

You also advised your readers "Don't fear a calamity in October. If we get a sell-off, it'll be a good time for late-comers to join the party that will see stocks higher in the medium term." Those who followed this advice and bought in January are now down 5-7%. Those who turned bearish while you were turning bullish and bought contra ETFs that go up while stocks are dropping are up anywhere from 10 to 50% for the contra double bear funds.

You also mention that the Fed dropping rates is good for stocks. You neglected to mention that during the last bear market, the Fed started dropping rates in the first week of January (2001) from 6.5% and although rates dropped more than 80% (to 1%), stocks (S&P500) fell more than 50%... The same thing is happening now in case you haven't noticed. You say above that rate cuts take a while to soak in - that time around it took two years!

You mentioned in your October piece that "The solid returns of the past five weeks have not dulled my enthusiasm for stocks. I expect 3Q earnings growth and forecasts of good 4Q earnings to keep this rally going." Have you checked earnings lately? As of March 13-08 a total of 3596 companies have now reported Q4-07 earnings on Wall Street (up from 3399 companies last week). Average improvements fell again to -56% (from -55% last week) indicating that the earnings picture is certainly not improving. This compares to a drop of 21% (4205 companies) at the end of Q3-07 reporting season and a 13% jump in Q2-07. Rapidly falling earnings is not good news for stock markets.

I couldn't disagree with you more when you say above "(1) the bad news has been more than sufficiently reported, which is why everybody gets angry when I suggest buying and, (2) cheap is cheap even in a bear market." That argument has been bandied about for months now but then events like the Bear Stearns crisis comes along shaving 90% of stocks prices. Certainly the bad news was not baked into BSC two weeks ago...

Maybe instead of dissing folks like Marc Faber who got it right in October when you were wrong and are still correct in their prognoses, you should spend some time learning how to read charts... As Faber says, we are in experiencing the aftermath of the biggest asset and credit bubbles in history. At no time in history has such a period ever NOT ended badly. It's a bear market and we are heading for recession at the very latest in 2009. That means trading a bear market strategy until the markets tell us otherwise. Telling people that it was a good time to buy in October was just plain bad advice and unless my leading indicators are wrong now, its time to short the rallies and cover on the dips.

[Purl Gurl]

Malkiel adds to reader value,

"While buying now would not be a wrong idea for the very long term...."

This is highly dependent upon adjustment for relative dollar devaluation and relative inflation over the coming years.

We do know dollar devaluation is currently very severe leading to a relative loss of purchasing power. Inflation is obvious through energy, food, gasoline and health insurance costs. On this hand, the dollar is worth a lot less. On the other hand, cost of living is skyrocketing. This is a lose-lose situation for average Americans. Although a taboo word, this is Stagflation.

Only way long term investing can be profitable is to net an average ten percent growth in portfolio equity per year. This is, of course, a net growth rate after adjusting for dollar value loss and inflation. This is not currently possible; long term value stocks are, on the average, losing value or value is increasing at a rate less than dollar devaluation and inflation. Overall, long term investments are being slowly whittled down by rising cost of living.

Only counter to this problem is aggressive, more risky trading which yields gains greater than cost of living increases, along with maintaining a much stricter family budget. Chances are high, cutting back on family expenditures will yield the greatest gains for average American families.


Malkiel makes an important and historic note,

“...situations like Bear where the writing wasn't on the wall of publicly available information....”

Securities fraud is an ongoing problem for decades, since the Great Depression. There is no argument but what Wall Street is organized crime given a wink of approval by regulatory agencies and by our government. This is all the more reason to get in and get out of stocks as quickly as possible to avoid having your money stolen by Wall Street financial criminals.

Bear Stearns is the most recent example of Wall Street crime and support of crime by the feds. A week back, Bear Stearns claims smooth sailing then sinks on Sunday. This is rather obvious deceit on the part of Bear Stearns but not so obvious to the chimpanzee sitting in the Oval Office.

Returning to high risk aggressive trading, I made an unethical killing playing Bear Stearns on Monday and Tuesday. I am staying out now because volatility has diminished. Some would consider this unethical day trading because I played upon the public’s fear and the public’s panic along with playing along with short covering. I have no shame, though, because I made a lot of money, lots and lots, and I have this money earning more money, elsewhere.

Malkiel makes a critical and a true point,

“...the only catalysts for improvement out there are good April real estate sales....”

Absolutely. This collapse of the real estate market is the core of our current financial crisis. There was a need for price adjustment in housing, this we know. However, this complete collapse in the housing market is the root cause of our nationwide financial crisis. The majority cause of the real estate market collapse is unethical if not illegal lending by the Wall Street boys. Rather ironic those Wall Street criminals are being bailed out by the feds, a reward for their financial crimes.

The feds are not addressing the needs of the housing market rather are addressing the needs of well known Wall Street criminals.

Next major contributing factor to our real estate market collapse, maybe an equal cause to financial crimes by Wall Street, is rising cost of living. American families are simply out of cash.

The feds are contributing to inflation to save Wall Street criminals.

Some blame must be shouldered by American families for not maintaining strict family budgets. A majority of Americans, today, are fat, lazy and financially irresponsible. Americans want everything, want everything now and do not want to work for what they want.

American families are contributing to this financial crisis through being financially irresponsible.

To close, only way out of this mess is for Americans to get their financial act together and for the feds to crack down on financial crimes. Doubtful either will happen. For those of us who are hard working and willing to sacrifice now for a secure future, our only choice is to become more aggressive about earning money to compensate for a continuing rise in cost of living, especially a sharp rise in cost of living which is at our doorsteps, right now.

For trivia, when I drive about in my old 1952 Chevy rust bucket pickup, which is affordable but slow and gas thrifty, each time I see a new car on the road, I think, “There goes a fool.” Almost every car I see on the road, is a brand new car.

For humor, come 2009 year, cost of living will surge; almost all of us will have no choice but to buy a new television. I will certainly miss those rabbit ears along with black and white television shows like “I Love Lucy.”

Okpulot Taha
Choctaw Nation

[Mr Tom]

Stocks, especially Large Banks are cheap here.

The two main arguments against this that I am reading here are:

1) Look at what happened in 2000

In 2000 Stocks were in a severe asset bubble. The PE of the S&P 500 was above 40 and remained above 30 through most of the crash (It was around 25 in 2003). The PE of the S&P 500 today sits at 16.6. If you look at the large banks here they are much cheaper with most selling at or below a PEG Ratio of 1, at or below a P/B of 1, and dividend yields at or above 5%.

Wachovia for instance has a PEG of 1.03 a price/book of .74 and a dividend yield of 9.0%. The CEO has come out on more than one occasion saying he sees no need to cut the dividend. While their revenue will be hit by the slowdown, their profits will be boosted by the rate cuts. The average Fed funds rate for 2007 was just above 5%. It sits at 2.25 with more to come if it gets worse. Wachovia had 11 Billion in interest expense in 2007. The cuts so far would add about 6 Billion to its bottom line. If you bring the rate down to 1% over the remainder of the year with another .75 cut then a .5 cut you would have an average for 2008 of about 1.5%. That would add about 8 billion to Wachovia’s bottom line (I say about here because I am assuming that the spreads between what they lend at and what they pay stay the same. It has actually been widening as you have not seen mortgages drop by nearly the amount as the short term rate.). Wachovia by the way earned right at 6 Billion last year and paid a dividend of around 4.6 Billion. Why would they cut their dividend when the fed will be paying for it this year? If Wachovia does not cut its dividend then it is only a matter of time before it reverts to normal through stock price appreciation. It may take awhile but what the hell, you are getting paid 9% to wait!

2) Look what happened at Bear with no warning.

No Warning, whose hedge funds blew up over a half a year ago, leaving many investors loosing everything? Did you think the companies’ owners (the common stock holders) would stay whole while the companies’ customers lost everything? Every financial blow up needs a sacrificial cow and this time it was Bear. The reason for the deal was to transfer the liability for the hedge fund losses to a company with the balance sheet to pay them (JPM a large bank I might add who made out like a bandit on the whole transaction).

I think if you are in a large bank you are safe from a complete melt down. The shock to the system will be too big for the fed (and other central banks around the world) to allow that to happen. And with the full faith and credit of the Uninted states tax payer they certainly can keep any of them afloat. I wouldn’t go too far down the food chain to the smaller banks here though because some of them probably will fail, and you don’t need to. The big guys have potential for huge capital gains here being so beat up.

To tradersystemguru who posted

“Those who followed this advice and bought in January are now down 5-7%. Those who turned bearish while you were turning bullish and bought contra ETFs that go up while stocks are dropping are up anywhere from 10 to 50% for the contra double bear funds. with the double short financial ETF.”

Your math does not make sense. If the bull call is down 5-7% wouldn't the double bear call be up 10-14% minus the huge expences you pay to sit in these guys. Also, Do you really need to double the volatility in the financial sector right now with stocks moving 3-10% per day as it is?

If someone had took your advise and bought SKF when you posted they would be down 11.5% in one day. It opened at 119.41 and closed at 106.66 on the 20th. We will see in three months how your recommendation pans out.