Monday, January 21, 2008

Stock Market Madness

The Stock Market will CRASH tomorrow. After today's carnage on the global markets stock futures for the S&P and Dow indicate that the major indices will open significantly lower. This scenario of panic selling in the face of some economic woes, and disrupted financial liquidity has been played out many times over decades of investing, and could well signify the beginning of a Bear market. However, history also tells us that such selling in the face of bad news and impending recession is often over done. Institutions and fund managers will unload shares indiscriminately to appease clients. Leveraged share owners will have to cover their margin calls by dumping shares for quick cash. Conservative investors or those near retirement will exit the market in fear of the coming financial apocalypse. In the short term their actions will be deemed sensible, and may save them further short term losses. Looking farther out - even a few months out, the markets could well prove them wrong.

The U.S. may experience a mild recession, but the economy is still fundamentally strong. The subprime debacle is deep, and still unfolding, but it's really only a big wave compared to the ocean of global bank assets and resources. Productivity, or the value of goods relative to manufacturing resources required to make them is high. Real inflation beyond oil and gas prices is manageable. Price/earnings ratios, projected earnings for 2008, and the fundamentals of many stock valuations are still strong and those stocks are now cheaper to buy with the recent big declines. If you have some courage, and stay invested in the fundamentally sound companies you will be rewarded.

I am not a financial expert, just a seasoned individual investor who has stayed invested through all of the market gyrations, even through the crash of 1987. In retrospect I was right to stay invested, but I regret not having more conviction, and investing in some of the bargain stocks that these large pull backs create. I plan to have the conviction this time, and expect that the next few weeks will provide some buying opportunities.

As for tomorrow, hold on tight if you have U.S. stock holdings, but don't panic. I will even go out on a limb here, and predict that the Dow will be up for the week by next Friday. At some point the fear will subside. The short sellers will cash in and buy back their stocks. Bargain hunters will wade into the market. The Federal Reserve will slash interest rates to stimulate liquidity, and there will be positive earnings reports from companies.

Who knows? The Dow may even find positive territory by the end of Tuesdays trading. Not that it matters, it's the long term that counts. Financial markets will be stronger by the end of 2008, but the bears may linger for a while early in the year. The apocalypse pundits will ultimately be wrong again.

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