Dashed Hopes?!?

By Duru

February 21, 2002

Well, you must have suspected that with the increasing drama building in America's financial markets that I simply could not remain quiet. This is simply too much to resist. You could write libraries on what has been going on during this dramatic period.

In case you are just joining us, or you have conveniently placed a mental block on the madness in the markets, I was last lamenting that while the massive rally in the markets last Fall sure was nice, the markets had once again gotten way ahead of reality. I predicted that if the markets did not wise up with January earnings reports, the reckoning must surely come with the April reporting period. I suggested that aggressive investors could try to ride the bubble if they dared, but that more conservative investors had time because surely they would see those Fall prices once again.

The indices are now largely indeed back to the levels of late October and early November, so this is ample time to insert my two cents. Those of you who still care must be wondering whether it is time to start hopping back on the wagon. This answer is more complicated than I would have anticipated given the type of pounding the indices have taken the past 5 or 6 weeks. There are some stocks that have ignored the storms and have gone about their business representing the continued amazing strength in consumer spending and our on-going need to eat and see our doctors. So, many retail and health care stocks are hanging right in there. Given that all the economic indicators are announcing a second half recovery should arrive on schedule, many cyclical names are also doing OK. The main source of weakness is in the "usual suspects" of over-valuation: the tech stocks. It is quite evident that without great stock-picking and market-timing skills, you will go mad trying to invest in technology. I suspect this will be the case for most of this year, minimum. The other glaring weakness is in companies with complicated financials and operations. The financial scandals that grow and infest more deeply our financial system represent the natural climax of a bubble bursting. The final smoke and mirrors around the stocks we used to love and want are finally getting cleared away. Since the courts take so long, and politicians are largely not courageous or knowledgeable enough to effect real changes, investors are getting revenge, and maybe even catharsis, by both selling viciously and keeping their dwindling cash "safe" in bonds and money markets.

Finally, all this selling and negativity so shortly after we just experienced post-Sept euphoria, represents what is likely the final roars of our cuddly bear market. This sell-off is vicious enough, harsh enough, that it will likely shake out the remaining "weak hands" in the market. It will crush people's faith in the stock market. It will keep people away from investing in the stock market the same way the vicious bear of the early 70s discouraged a near generation of individual investors from even thinking about stocks until the next bull market was well underway in the early 80s.

The market is now at an incredible juncture. Lots of stocks have been pounded into submission and are STILL over-valued and many of the survivors are probably still predicting a more vigorous recovery than is in store for us. The stocks that have done well must certainly be priced for perfection now and are not worth chasing. Given my past history of commentary, I am sure you would expect me to drop more "I told you so's" and "sell everything and run quickly" and "don't forget all the dangers still facing the global economy." Shockingly, I finally have a different investment message I want to share with everyone. If you can dig contrarianism, you just might uncover some gold in all this dirt flying around.

First, for you more conservative investors, this is the time you begin to seriously take a look at your favorite investments (most likely mutual funds). Many stocks, especially tech, have already re-tested their September lows (and many of those tests have flunked miserably) and the major indices just might follow. If I am correct in thinking that at best the markets will be flat to barely positive by year's end, the big dips of this year will be decent buying opportunities. Even those stocks that have done, and should continue to do, well could eventually be tugged down into the selling vortex. Given that some type of recovery should be coming, it is not wise to just assume that the market is definitely headed back to those dreary September lows. The market is in panic mode and not all selling is "rational" right now. If there are no bargains around to get you salivating, you need to be setting out the conditions for investing and be ready to pounce when the price is right, even when fear is the order of the day.

For the more aggressive investors out there, this is exactly where you want to start dropping some cash in your favorite names. Even speculating could pay off, but there is no need to risk the capital. The idea is not to spend the whole kitty at once, but to start buying when key support levels seem to hold. I will leave it up to you as to whether you want to sell if these support levels are violated by certain percentages. I will also leave it up to you whether you want to take profits when you get them. If you are investing in names (or funds) that will do OK in a stable economy, you should view all further weakness as even better buying opportunities. If you have the wherewithal, you should seriously consider a bit of hedging through shorts and/or options that will generate more cash for you if the market continues to weaken significantly. Put that cash to work on additional long opportunities.

I realize all of this is easier said than done (heck, even though I began liquidating most of my mutual funds back in November, I have not been able to keep my overall portfolio safe from this latest sell-off!). By actually recommending some buying now, I am NOT trying to gloss over the real risks that remain in the American and global economies. If you are truly too sick and tired of the market (remember, this sell-off is specifically happening to get the average investor out of the market), there could still be opportunities in high-yield corporate bonds which will do very well if the economy recovers this year. And if even THAT seems too risky for ya at this time, certainly a 1% before-tax, before inflation return in money markets is still better than -5% and -10%!!! So, you have my full sympathies!

Be careful out there!

Coming up eventually, whatever happened to tax cuts and all that economic stimulus??!? Are we doomed once Master Greenspan retires? And will our homes be the last asset standing in America?