Insights & Advice

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Sometimes You Just Gotta Have Faith

As the markets close the week with losses that has set all kinds of world records, you have to wonder what’s next. Will the Dow Jones, which notched up its worst percentage and point drop in its 112 year history, have a repeat performance next week? Much will depend on what happens this weekend.

Finance ministers and central bankers from the G7 (Group of Seven Nations) are meeting tonight and tomorrow in Washington to try and come up with a coordinated response to the crisis and panic which has gripped the world’s securities markets for the last ten days. That may prove difficult since none of the nations have been able to come up with more than stop gap measures to date. At the same time, rumors swirled that both Morgan Stanley and Goldman Sachs, the two remaining mega investment banks, might need a helping hand from the Treasury.

There is also a growing expectation , confirmed by the Treasury on Thursday, that Henry Paulson is seriously considering purchasing a stake in the top seven or so U.S. banks. As a result, what looked to be another Black Friday when the Dow opened down 700 points this morning, turned around by the end of trading suffering a ‘mere’ 127 point decline. The NASDAQ actually closed up and the S&P 500 lost a little over 10 points. After a week of double and triple digit declines, today was the first day any of the averages were in the green.

Clearly the markets are oversold. They are stretched to the downside like a long thin rubber band. Not in the last 50 years has the markets been this oversold. I’ve looked at the last seven oversold corrections. In each instance, the markets bounced an average of 13% at this point. In five cases the markets then rolled over and hit a higher low while in two cases the market fell to new lows. The problem is that this correction has broken all the molds; not technical, nor fundamental or momentum indicators are working here.

“You gotta just believe,” said one client today.

He’s right. Step back and think about it. The way investors are dumping stocks you would think we will never eat, drink, drive, go to the movies or use toilet paper ever again. Some of the greatest companies in the world—GE, IBM, Microsoft, Exxon, Wal-Mart—are being dumped indiscriminately here. I smell a buncha bargains and expect to go shopping carefully in the days ahead. Maybe I’m early but what the heck. It’s like being a kid in a candy store where there are 50% mark downs on all my favorite treats. But that’s just me.

If you have been unfortunate enough to be still fully invested stay there. I have to believe that we are more than 75% through this mess. If you are waiting for an entry point, let the market be your guide. Don’t be a hero. I expect once the market stops falling there will be a long flat line period. Picture an L shape recovery that could last until the second or third quarter of 2009. And no, I do not subscribe to the five to ten year recovery or talk of the second Great Depression. That kind of nonsense may sell newspapers or TV ads but it doesn’t sell me. I’ll stick with the belief that as long as there are people like you in this country, we’ll get through this one together.

Posted in A Few Dollars More, At the Market