The Dow is now down 41% since the Bush administration commenced their bailout and stimulus program in September, and down some 30% since the election.
Bailouts and stimulus produce long term uncertainty. Right now the markets are telling us that enhanced government involvement in the economy will crowd out private investment, and higher costs to finance our national debt will dampen future growth and hurt earnings prospects. The markets are telling us we can't keep bailing out every insolvent bank and backstop every bad mortgage. This desperate act to avoid pain is not a strategy and the markets see through it. If we keep digging the hole we are in, throwing good money after bad, we are going to run out of money.
There is no question the economy is heading in the wrong direction and will continue to experience substantial distress. There are three likely scenarios from here. One, if the stimulus package works and the economy recovers. This will be good for stocks. Two, if the stimulus package proves insufficient and we get a Japan style protracted period of low growth and low inflation. This will likely be good for value stock pickers, but hard on everyone else. Three, if efforts to revive the economy prove futile and a deep depression ensues, which will not be good for any equities.
I have no idea which of these is most likely, but I believe that because of policy failures of both Bush and Obama, and because of the desultory performance of the economy, the market is already expecting a depression, and stocks are priced accordingly. So if we end up not having one, the market will rally substantially.
Some people think they should wait until things clear up before they commit to stocks. But the future is never clear, and when optimism abounds, you pay a very high price for stocks. One should not equate the current uncertainty with risk. There is plenty of uncertainty now, but much less risk, because high quality stocks are available at much lower prices, and logically an investment is more attractive AND less risky if made at a lower price.
This should be obvious: Wouldn't you prefer to buy the house down the street at a lower price? Wouldn't you consider that same house to be a better investment, with bigger upside and smaller downside, at the discounted price?
The stock market anticipates future events, and bottoms well before the economy does. Historically, a small percentage of trading days has represented a large proportion of returns. Because very few people can consistently predict macroeconomic events and investors rarely foresee the big market moves, sitting on the sidelines can have large opportunity cost.
The only thing you can do is think about individual business values, and make rational judgments about them, building an investment portfolio with the odds stacked in your favor. We at Wellcap Partners believe this is the best time in many decades to buy quality businesses at what are clearly very attractive prices.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.
The markets recall a recent time of unbridled deregulation that allowed the risks to be handled by the risk-managers.
Markets had said things were going just peachy and we reached unprecedented highs on the risk-managers' say-so.
Now the markets are telling us that the risk-managers were dumb.
Those risk-managers had a focus on the probability of a failure, presumed about zero, rather than on the amount at risk.
Those risk models assumed the probabaility of the underlying market asset - real estate - could not go down inn price.
They were betting, highly and heavily, that the risk of housing prices going down was zero.
If you multiply zero times any amount of risk out there, it looked like a safe bet.
Now, the markets are telling us that they had it all wrong.
The probability of housing prices going down was based directly on a historic economic relationship with the income of the buyers of the houses.
All the money went into making more and more bets on new financial "risk" thingies, and less and less on growing the incomes of homebuyers.
Something was wrong with that picture.
THAT is what the market is telling us now.
That the market was wrong in the first place.
No matter how hard the biznews tries to blame it on Obama, the markets screwed themselves.
We really don't care what you think about the market because you ultimately bet against it.
Wall St. should be rebuilt from the bottom up.
Nonsense. The risk that a stock can go down 20% further is the same at $1 as it is at $10. The only thing that changes is how many shares you have to buy to lose the same amount of money.
This info-mercial brought to you by your friends at Swell-Cap.
This isn't some normal situation. This is the result of a giant pyramid scheme by the traders and executives that has run its course and left the people holding the bag.
Wake up folks. Wall St. has been a casino for many years now. certain people had control or enough influence of it fleece the rest of us. Now they have taken off with the money.
Tough new legislation is finally put (back...) into place, both within the United States and in the various other nations where the "multi-nationals" had set up safe-harbor.
... and the legislation actually works. Credit is once again bought and sold under genuine (not fraudulent) conditions and for a fair price. It is available not only to companies as big as Warren Buffett's but to the individual consumer, all as it should be. Protections are put into place so that people no longer feel that they are being used as pawns. Fundamentals like health-care are made uniformly available, thereby not only removing the spectre of financial ruin but also making the health-care system once again truly profitable.
Call it human nature... we know what to do but we really don't want to do it.
I forecast, though, that these changes will be made ... and will be made very soon ... and that the effect will be dramatically POSITIVE. "Remove the crime, remove the grotesque unfairness, remove the indefensible dangers ... and stand back, because this train is LEAVING the station!"
The stock market didn't like it when we didn't bail out Lehman, and it didn't like it when we subsequently bailed out AIG for the first time.
There's nothing that the government can start doing or stop doing that can make the stock market happy.
Normally, the best way to placate the stock market is to stay the course. But since the current strategy involves a steady regimen of debt for equity swaps, the stock market won't like that either.
Forgotten amid the debt crisis is a profound structural transformation in the real economy roughly characterized as a shift from energy to information as the lifeblood of economic progress.
The market is telling us that old business models are dying and new business models are have not yet emerged to take their place. It's a market that's searching for new winners but hasn't found them.
The stock market can come back only once it finds a new Google, a new business model that captures and shapes the essence and opportunities of an emerging post-industrial economy.
The "Market" is a lie and a myth. Peoples' belief in it has allowed the people who own it to rip them of for years, much like a casino. You are always playing against the house. The insiders always have an edge. The market has been corrupt for years. It was totally corrupt before the last depression and it is totally corrupt now.
The DOW is at 1997 levels. And I would say the near term future for many DOW stocks looks worse than it did in 1997.
SOME stocks will prove to be good investments at this point in time. As for me, I'm worried about paying rent next month, and the idea of ever retiring is a fantasy.