Thursday, January 17, 2008

Blood on the Streets

Well, it was another terrible day on Wall Street. Stocks were pummeled, as Ben Bernanke spoke before congress, but could not assuage the markets. It appears that he is completely reviled, and he is not acting quick enough. In actually, there is likely little the Fed can do to prevent recession. The major roles of the fed are to control inflation and try to keep unemployment low. Otherwise, it is tough for the Fed to enact policies to fix this marked economic slowdown.

There was other bad news that sent the stocks into freefall today. The Philadelphia Federal Reserve said its survey of regional manufacturing activity registered a negative 20.9 from a revised reading of negative 1.6 in December. Also, housing starts fell 14%, marking the slowest pace in home building in 16 years.

Friends, we are entering, or likely are already in, a recession. It feels like we should just bail out of the stock market and put money into money market accounts and CDs. But, keep an eye on the long-term. This is really a tremendous buying opportunity. The guys (and gals) at my favorite show, Fast Money on CNBC, think the bottom is near. We really need a "shake out" for things to turn around. What I mean by this is that everybody has to be disgusted by the market, blood has to be on the streets, the "fear factor" has to be through the roof. As this happens, the VIX (CBOE volatility index) will spike up hard.

It was up over 15% today, a huge move. Then, when volatility is at it worst and fear is at its highest, is when all of the "smart money" (institutional investors) come in and start buying, signaling a bottom and the return to a bull market. You can see the inverse relationship between the VIX and the Dow in the chart. Is the bottom near? I'm not so sure. There is still a lot of bad news out there, and the poor earnings will be reported over the next one or two quarterly reports. But, the people on Fast Money (Jeff Macke, Guy Adami, Karen Finerman, and Pete Najarian) are experts, and they are right much more than wrong. I hope they are right in this case.


Will said...

Steve - I know so little about the stock market it's frightening but if we're in it for the longhaul, trying to wait for the exact bottom isn't all that crucial, no? I mean, we could miss out on the steal of the century but a solid bargain is OK too

Cocameister said...

Will, no one can pick the exact bottom. I think we should buy now, because we will never be able to pick the bottom (the experts cannot). The main point of my post was that hopefully, for stocks/funds that you already have invested in the market, the hemorraging will end soon. Your point is is worth it to invest now and take a 5% immediately loss in order to catch a possible 20-25% upswing that will ensue in the intermediate term. The upswing, when it occurs, will occur very quickly, thus waiting may mean missing a 15% run up.

Bob said...

I can pick bottoms.

Jeanette said...

I hope this Bob isn't my dad.