Archives: 2007 October

An article in The Motley Fool points out the wisdom of buying quality stocks cheap in order to get the best investment results over time.

Sounds pretty easy, eh?

Actually it is much more difficult than it sounds due to a few rather obvious reasons. One is that to step in and to buy stocks when most everyone else seems to be selling them is not an easy thing for most folks to do. The author of the Motley Fool article points out that a great time to have bought stocks would have been after the 1987 “Black Monday” market collapse. On that day the Dow was down about 22% in one day.

Sure those who stepped up to the plate and made selective purchases in the days following the crash were able to buy stocks in good companies at great prices. With the advantage of perfect hindsight it is easy to see that some real deals were offered then. However, for those suffering the shock of Black Monday their vision was probably not quite as clear. Fear has a way of blurring things for some time.

US Stocks fall hard today, the Dow was down about 367.00 points, after investors finally sat up and noticed that there are currently more problems than solutions about in the investment world.

“You started the day off with traders’ superstitions because of the anniversary of the 1987 crash and meanwhile you’ve had a bunch of companies come out talking about the weakness of the economy,” said John Wilson, chief technical strategist at Morgan Keegan.

When I asked the question “how long can stocks hold up” yesterday I didn’t have in mind such a quick reassessment of investment prospects. The 20th anniversary of the 1987 “Black Monday fall of about 22% in the Dow, all in one day, must have crossed more than a few older, more seasoned investors minds as the Dow put in the third worse daily performance of 2007.

But really folks, with crude oil trading in the $90 a barrel area, with gold heading for $800 an oz and probably well beyond, with the fallout from sub prime mortgage lending loans spreading across world financial markets like toxic waste carried by a hurricane, with foreclosures skyrocketing, with the poor suddenly unwanted US Dollar sinking at an accelerating rate, and President Bush still harboring delusions of conquering the world and talking about World War III, what do you expect?

How long can the US stock market hold up with crude oil prices setting another record high above $90.00 a barrel, with another round of ARM resets underway, with credit card debt exploding, and hot spots around the world getting hotter?

While an old wall street maxim is that the stock market climbs a wall of worry the present worries look more like a mountain to me, not just a wall. To answer the question posed above my own opinion is not very much longer.

The quality of debt held by leading financial institutions around the world has been very much effected by the over use of financial leverage. The packaging of sub prime mortgage loans into toxic mortgage bombs now held by these institutions is only part of the story. In addition, trillions of dollars have been “invested” in exotic derivations, many which have no liquid market.

This is not a time to believe the TV talking heads and to be bold. It is a time to protect your assets. All hell will probably break lose within the next few months. Stock market sentiment may well abruptly change once crude oil tops the psychologically important $100.00 a barrel level. That may not take very long given the current trend.

Yesterday the 30 stock Dow industrial averages gained nearly 192 points to end at an all time high of 14,087.55. Today the Dow backed off about 40 points in a cautious reaction to additional terrible news out of the housing sector.

After the National Association of Realtors Stocks reported a bigger than expected decline in the August pending home sales reading moved steadily lower. The home sales reading index slipped to its lowest level on record.

Since the Federal Reserve Bank cut the discount rate and the federal funds rate by 50 basis points on September 18th, the stock market has rallied almost 5% to new highs.

“What the Fed did had more to do with psychology than fundamentals. It showed the markets it would provide liquidity and not cause the housing markets to cause more havoc,” said Jeff Cummer, president and chief portfolio manager, with SMH Capital Advisers, a Fort Worth, Texas-based money management firm.

However, looking forward the impact that further weakness in the housing market may have on the entire US economy should not be underestimated. It is my view that it is much better to sell stocks on strength than on weakness. Prolonged weakness in the housing market will drag the economy into recession no matter what future actions the Fed takes.