A Few Reasons to Think Twice before Jumping into the Stock Market

[Mike 03]

There is a lot of pressure now from investment managers trying to convince people to jump into this market. This morning on Bloomberg I listened to at least three people try to argue optimistically for this being the perfect time to get in. Even Warren Buffet is (rather sloppily IMO) encouraging people to bargain pick equities, almost like it was as simple as plucking ripe plums off a tree. There is some truth in the notion that stock prices are generally lower than they have been. The P/E ratios have come down substantially. But as Bill Gross of PIMCO said today, stock prices could become cheaper. They are less expensive, but they are not yet inexpensive if you examine the price to earnings ratios. I'm not opposed to selective, well-researched bargain hunting. But it's not as easy as saying "Citibank is at a historical low and it's too big to fail, so I'm going to buy this stock and must go up."

That is a great way to lose a lot of money quickly.

Nonetheless, there is a lot of wishful thinking that we have tested and re-tested the bottom of this market. Indeed, it may be forming a bottom. But there are a few things to keep in mind:

1. We are entering a protracted and deep recession that even the most optimistic experts don't believe will turn around until the end of 2009; most economists are hoping for a turnaround in 2010 or 2011.

2. There are still some huge disasters pending. Residential mortgages and MBS is one issue that we are experiencing now, but we still have commercial mortgage backed securities, the credit card crisis (unfolding now), the thirteen trillion dollars or so in complex derivatives that are not even close to being dealt with yet. Home prices probably have another 20% or so to fall. After the first of the year we can expect a tidal wave of retail and perhaps other small business bankruptcies.

My point here is that this market is behaving very irrationally right now. It collapses on bad news or good news. It soars on bad news or a tidbit of good news. There is so much bad news coming over the next 24 months that this market will most likely experience continued volatility. Even gold is not behaving as one would classically expect, perhaps due to the fall in oil, but probably also subject to some other irrational forces that I don't understand.

Because this is a global contraction, even once-enticing overseas markets are not good bets. Emerging Markets that were up 70% mid-decade are crashing to pieces. Some people know how to play currencies, but I don't. I don't expect the Dollar to continue to show "strength" as the U.S. hoses the world markets with printed liquidity.

There are also funds that go UP when the market goes down, but these require constant vigilance and a lot of discipline to play correctly, although they could be a good hedge in a balanced portfolio.

I know there are some good ideas out there, but even these are subject to capriciousness: there are corporate bonds, high yield corporate bonds. In some cases these yields look too good to be true. There are also convertibles, Certificates of Deposit.

And there are the old standbys like Treasuries, even though the yields are disgraceful. Some money market funds (IMO) are still safe, although some research is required when picking these too, as there have been "runs" on money market accounts since mid September.

Don't get stream rolled by the cheerleaders on CNBC or other investment-minded venues to feeling you have to invest in this market or you will be left behind when it roars back to its former glory. I don't think there's any rush. This is a time for extreme caution.

Just my two cents.

Happy Investing.

[DJ13]

1. If now was really the time to buy they wouldnt be telling people to buy

They would be quietly buying stocks themselves, than they would sell it much later at a profit when the market has recovered.

This is just the big money guys trying to get out by getting the rubes to take the dead stocks off their hands.

[Zenlitened]

2. K&R. Good post. - n/t

[RagAss]

3. Don't buy yet....give me a year of buying head start before you all jump in !

[MazeRat7]

4. Agreed. Caution, diversity, and research are paramount. n/t

[Warpy]

5. Sound advice

because the second half of the mortgage debacle will hit next year, along with what he mentioned in commercial credit and credit card debt.

Nothing will prevent the first disaster, but the second two can be greatly alleviated by addressing the demand side of the economic equation, IF creditors go back to sound lending practices like establishing credit worthiness and limiting debt to what someone can reasonably be expected to pay off.

I'm in no hurry at this point, although there are a few very tempting bargains out there. I might do some shopping before the end of next year, but it will be highly selective shopping.

[rucky]

6. I've been playing on a really small scale.

I put 50 bucks into Scottrade, and will not put in another cent. Bought a few shares of Citi and figured what the hell, I'll see what happens.

[natrat]

7. they keep protecting that 7500 level-maybe 3rd time down is a charm

i certainly wouldnt touch this right now

i was planning to put quarter in from 100% cash @ 5800 to 6200

but i'm a chickenshit so i probably wont

what happens when it hits the point where margin calls create an avalanche, wouldnt want to be on the wrong side of that ...sigh

[TexasObserver]

8. I won't even think of getting back into the markets until late 2009.

I got out in January, and I won't be getting back in until late 2009 or early 2010. Anyone who says we're at the bottom now is either lying or incompetent. We will see the DOW close below 8000 again in the next three months. Who wants to buy a LOSS?

[natrat]

9. even with some kind of bottom it might only be an intermediate term bounce

the mkt took 30 years to recover after 1929
the 70s were flat




http://urbansurvival.com/week.htm

[TexasObserver]

11. I'll be shocked if the DOW doesn't close above 10K in 2010.

I don't expect to see the DOW return to 14K until at least the 4th year of Obama's first term.

[K Gardner]

10. Wish I'd read this before I invested money in October, at what the cheerleaders were saying

was "THE BOTTOM", LOL.

My investment is now worth half what it was, and now they're saying "BUY ON THE WAY DOWN !"

I'd rather have thrown money away on a new Home Theatre System if I was into the throwing money away thing :-)

[Thickasabrick]

12. Good investment for the long term - that's +five years - not 1 or 2 nt