The Worst Is Yet to Come

The market has separated out those businesses that are undervalued and those businesses that are of concern going forward. The smart investor shall take this opportunity to seek out undervalued good quality companies in this severe bear market.

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The Worst Is Yet to Come
http://www.fool.com/investing/high-growth/2008/12/24/the-worst-is-yet-to-come.aspx
By John Rosevear December 24, 2008

Great rally we're having, isn't it? In the past month, the S&P 500 has risen from around 750 to right around 900 before falling back slightly. Right now, you've got a nice neat 15% gain. Think we're through the worst of it?
Think again.
My magic crystal ball doesn't work any better than anyone else's, but if I had to guess, I'd say we'll be back down near the lows before winter ends. Consider:

• Reality -- and more pessimism about the economy -- may set in after the Obama administration takes office and optimism gives way to the sober understanding that the new team's economic solutions will take time to work, and will be expensive.
  
• Along the same lines, the recession has hit Wall Street and the upper echelons of corporate America very hard, but the serious pain is just starting to filter down to Main Street. That process will intensify over the next few months.
  
• Past bear markets have been marked by sharp rallies off the lows -- followed by sharp declines right back down. The true end of a bear market is typically marked by a point of maximum fear. That's when it seems like everyone's throwing in the towel, and when there's little talk of bargain-hunting.
  

That last point is the one that's most convincing for me. Do you think we're at the point of maximum fear? If you've been investing for a while, root around in your memory and think back to late 2002.

What I want right now are the stocks that we'll be citing as examples during the next bear market, seven or 10 years down the road, the ones that will be 20-baggers or 40-baggers, the growth leaders of the coming decade.


Some comments:
On December 25, 2008, at 3:58 PM, dibble905 wrote:
If November 20 wasn't 'retesting the lows' set on October 27, in terms of the dow... I don't know what to tell you. The drop was quick and enormous, with that week in October registering the worst week by absolute and percentage terms in history.
We are now back to the early 2003 levels for the S&P and Dow, erasing pretty much all of the recovery and expansion that has occurred in the past 5 years. And worse yet, that places us back to 1998 before even the dot come bubble.
We are at the cheapest valuation in history in terms of companies with tangible, real assets (Dow & S&P). If this is not an opportunity, I don't know what to tell you. If there is more to fall, so be it. But it will be driven by emotions rather than logic.
All of this 'the worst has yet to come' is out there, everyone is reading about it, everyone knows about it. The collective expectations of the world are priced into these stock price right now, and unless something overly catastrophic beyond even the worst expectations become true, the markets will rebound in the next year. Fear is in these markets, fear will continue to be in these markets. It will limit upward movements, but I really cannot see large scale drops like we have seen in October/November without what I suggested above.
And to provide some support for my argument, hedge funds and mutual funds have enormous cash positions waiting on redemptions or to protect their positions. Either way, even if things do get worse, what's left to sell to drive markets down so much more? As well, when these large funds sell, someone's buying it -- who's buying these assets? It looks like the companies themselves are installing share buyback programs and insiders are actively purchasing. These may be a publicity stunt to stop the blood shed, but you know what, it'll probably work because it shows some confidence -- something that's been lacking lately. We also no longer see all stocks following the same broad market declines -- strong companies are rebounding 100-200% from their lows. The Dow and S&P aren't producing the same results, but that just separates the ones that were oversold and the ones that do have material concerns going forward.
Be diligent and prudent, and you'll live through this. But don't hold off on an investment because you 'fear' a bigger drop coming. Unless you have some basis surrounding that, it's all emotion -- and no one rewards you for emotions.

Report this Comment On December 25, 2008, at 6:43 PM, dgmennie wrote:
The latest stock market tumbles serve to underscore the fact that putting money into equities is essentially a GAMBLE (as opposed to an investment). How many blue-chip big-name companies and "sure things" of just 10-20 years ago still qualify as such today? Far too many have gone belly-up or merged themselves out of existence. Too often common stock owners are left holding worthless paper (hello ENRON). And this trend will continue, as the timeline for getting in and (more importantly) GETTING OUT becomes ever shorter and more unpredictable (DO YOU HAVE INSIDE INFORMATION?). Unless you are a very skilled and lucky stock trader who is emerged in the markets full-time, you will eventually LOOSE BIG. Depending on others to watch out for your best interests in this game is nonsense (I give you the 50-billion Ponzi scheme all over today's headlines).
Instead, look carefully at the bond market. Certain corporate issues may be acceptable. Many municipals offer reasonable returns backed by the fact that states and local governments cannot simply disappear someday, leaving their debts unpaid. Fortunately, the yuppie go-go crowd finds the plodding predicrtability of these investments a turn-off. All the more reason why those who value protection of principle over "the next big thing" should get on board. IMPORTANT: Own the bonds themselves, not a "bond fund" whose assets will be churned with the profits sucked off by incompetent and overpaid managers.