Insights & Advice


Thirteen Days

So far this pullback has lasted a mere thirteen days. During that time the Dow has corrected 6.9%, the NASDAQ 8 % and the benchmark S&P 500 has lost 7.4 %.That makes it the deepest correction since the rally began in March, 2009 and it’s not over yet.

In my column last week “No Pain, No Gain” I made a guesstimate of how low the S&P could go before bottoming out. That range was 1025-1035. I will widen that range a bit this week to 1015-1030. For long-term investors, that range should not matter too much since I believe that once we finish this overdue correction, the S&P 500 could rally back to above 1200 or more. That could give the astute investor another 20% return for 2010.

“But what about Europe, I hear Spain, Greece and Portugal are all bankrupt,” said a worried investor from Great Barrington, MA this week.

He was convinced that these countries’ on-going sovereign debt problems would have severe repercussions in Europe overall and usher in the demise of the European Union. And in a domino-effect, Europe’s problems would drag down our already-weakened U.S. system and before we know it—2008 all over again.
Although I agree that the so-called “PIGS” of Europe –Portugal, Italy, Greece and Spain—are having a difficult time, so are many other countries. They are grappling with a global economy barely out of recession, a history of too much debt and not enough revenue (taxes) to handle their interest payments.

At the same time, their citizens continue to demand policies and follow behaviors that further impoverish their counties. The Greek government, for example, estimates that less than one third of their citizens pay taxes. The point is that rather than bringing down Europe, if push comes to shove, countries like Germany would simply shove a PIG or two out of the EU if necessary, at least temporarily. Yet, investors are nervous and are starting to sell emerging markets across the board fearing that they too may have hidden debt issues.

Remember last Thanksgiving weekend when Dubai, one of the oil-rich United Arab Emirates, had admitted to some issues with $80 billion in debt? Both Asia and Europe experienced sharp sell-offs totaling 4-5%. By the time the U.S. market opened for business that Monday the crisis was largely averted. European leaders will do what is necessary to resolve this crisis of confidence but it sure gives traders and hedge funds a great excuse to knock the markets down and make a lot of money in the process.

You see, my dear reader, I am not the only one who believed 1,150 on the S&P 500 would trigger a correction. Those who did “went short,” meaning they placed bets on the market’s decline. Every percentage point decline in a stock, index, commodity or whatever means profit and a lot of it. So they definitely have a lot at stake in pushing the markets down 10-12%. Think about it. In 13 days a short position has garnered 8%. Not a bad two weeks worth of work if you can get it.

So how do you, the little guy, profit from this? You buy when the blood is running in the streets as a certain Baron once said a century or two ago. If you have been waiting for just that right moment to get back in the market, now’s the time, for those who have been following my advice and have cash put aside for just this buy on the dip opportunity, then get to work. Just don’t try to call the bottom. Buy selectively and bit by bit over time.

“Are you nuts,” demanded one caller, who I advised to start averaging down this week.
“The markets are dropping like a stone. Who says it will stop at your level?”

And that my dear reader is the crux of the matter. I don’t know if it will bottom at 1,015 and I really don’t care. What I am looking at is value. Value is just starting to show its lovely head. The economy is improving, companies are beginning to make real money again, or it appears so from studying fourth quarter earnings results and equity prices are on sale. What’s not to like about that? All it takes is courage to buy.

Posted in At the Market, The Retired Advisor