Listen to experts – and go broke

While reading through the news today, I saw several articles and stories talking about how now is a good time to buy stocks.  I’ve been reading this same type of story since mid 2007, and there’s one thing they all have in common – they’re all wrong.

They’re wrong because the “experts” the writers quote in the stories have incorrect assumptions about the current situation.  Most all are assuming that this is a typical mild recession, that makes for a quarter or two of bad earnings, then stock prices resume their upward march.  They make this assumption because that’s how stocks have behaved (for the most part) since the early 1980’s.

But this is not a typical recession because the problems with our economy are structural.  It takes much longer to work through structural problems than a typical business cycle downturn where nothing long term is really wrong.  Structural problems go deep, and they require massive destruction of debt in order to re-establish a strong financial base from which to start building again.

Here are a few links to news stories from the past couple of years.

An Alarm Is Blaring: Time to Buy (NY Times, May 18,2008) The S&P 500 index is down over 40% since then.

Why you should be buying stocks now (Money Magazine, Dec 3, 2008) S&P 500 down over 10%.

International experts aren’t faring any better – especially Anthony Bolton in England.

Anthony Bolton: Why now’s the time to buy (UK Telegraph, Jun 10, 2008) FTSE 100 down over 30%.

The same basic story was re-run on Oct 6th.  Anthony Bolton: Why now’s the time to buy FTSE 100 is down over 15%.  Hey Anthony – if you keep saying it, eventually you’ll be right.  And most people will forget all times you were wrong!

Back to the US.

Resist the Impulse to Panic Over Finances (NY Times, Mar 22nd, 2008)   S&P 500 down over 40% since then.  Also, I wonder what Mr Tysk is doing these days?  Anyone who actually took his advice has lost 40% of their money.  He said “Small investors always make the worst timing decisions because emotion is involved,” Mr. Tysk said. “This is precisely the wrong time to move to safer options. The stock market has dropped dramatically and now is the time to invest — don’t close the stable door after the horse has left.”

Just a couple of weeks ago, The NY Times ran a story titled Why Analysts Keep Telling Investors to Buy and there were lots of reasons given.  But basically it boils down to the market goes up long term and you need to be in the market.  That advice is just as wrong  today as it’s been over the past 18 months.

It’s wrong because the market doesn’t always go up, just as people have now realized that housing prices don’t always go up.

I don’t claim to have a crystal ball for stock prices – hell, I bought Nortel 3 years ago at $3 because it was “cheap” and now they’re broke and I lost that money.  But I’m tired of stories saying that “no one predicted this” and “the depth of the financial crisis was missed by everyone” because it’s wrong.

I predicted this back when I first started this blog.  One of my earliest posts was Another Prognosticator Oops! where I gave my opinion on what was going to happen.  That was in January 2008, and I said I think it’s waaay to soon to be looking at this sector.  Personally, I think we’ll see a couple of big bank failures before the financial house of cards has collapsed fully.

We won’t be at the bottom until the losses are all acknowledged and reflected in the balance sheets and earnings.  I’ve lost track of how many times I’ve read where companies are throwing in the kitchen sink in an attempt to get all the bad news out there and move on.  But yet they haven’t.  Losses continue to pile up – in fact, they’re accelerating at this point.

This was the first quarter ever that the S&P 500 had no earnings.  The aggregate losses at this point are over $10/share.  It’s impossible to do a P/E ratio calculation on the S&P 500 because there is no E!

With the benefit of hindsight, it may turn out that right now is an excellent buying opportunity, but I don’t think so.  Based on the predicted earnings for the next 12 months, stocks are still about 40% too high.  The S&P 500 should be about 550 right now in my opinion.  So either earnings have to go up dramatically, or prices need to fall.

What do you think is more likely? 🙂  I don’t see higher earnings forecasts for many companies this year, do you?

gk

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