I Eat Bear

Another big drop in the market today. Caused largely by the court jesters (Congress). But, to be fair to them, it would have happened anyway.

But, probably the best sign the market is near bottom, is the widespread panic about stock prices, and the market as a whole.

Then again, from here there are only two choices. First, is the total demise of the market altogether. That is highly unlikely, as I have to believe Wall Street is smart enough to simply stop ALL trades before that could happen. Still I do not think we are too far from that happening. I do not think anyone will allow the Dow to fall to 8000, before the markets close doors for a period of what could be months. The more realistic possibility, is that stocks will begin a small rebound. I do mean SMALL.

There is already too much bad news built into the market/stock prices already, so the coming earnings season is not going to do anything but prove the world is not coming to an end. Oh sure, I expect a lot of earnings misses, and I suspect retail is going to be hit hard, not only in this quarter, but the next two. People are in bad shape, and spending is going to suffer.

But, the bulk of businesses should have something positive to say about what they see on the horizon. Yes, I expect some inventories to be building. Not really a bad thing, just profits yet unrealized. Costs are being absorbed right now by most goods producers. Production is slowing, but not stopped. Many companies have several years worth of backordered sales, and these companies will be showing profits. New orders may be slowing, as businesses will be reluctant to finance, but if products have long lead times, orders will still come in. They have to, to protect the long term viability of the companies.

I expect good things from most oil drillers in this earnings season, as most rigs have been contracted for years into the future. Some companies that hedged well into the future may see some problems, as prices may be falling (to keep demand strong), and falling prices will cut into profits. But the comanies that hedge will also be reaping profits, as they will be getting resources at lower prices too. It depends on which side of the supply/demand curve your company is on if this will be a good market for a company or not. There will be winners, and there will be losers.

But, my point here, is there will be some winners. And, some will be enough to put an end to the terror striking the market right now. The most likely scenario I see, is that there will be a return to looking for individual stock winners, rather than the continual pounding of the market as a whole.

Banks and financial institutions will continue to divest, which will keep the heat on selling pressure. They will because they have to shore up balance sheets, still covering losses from the housing crisis. There will be few new loans, and more loans already made will be failing, as the economy as whole begins to fail.

But, the bright spot in all of this is that money on the sidelines will begin to return to the markets. The bulk of the carnage is over! The markets have done their thing already. Well, to be very fair, there will be one more big dip, but there should be a mild recovery before that happens.
And when exactly will this dip occur, and why? The US elections will be the cause, and no matter who wins, the market will tank (as changes will be occuring, and the market frowns on change). It will be worse if Obama wins in my opinion, and I expect it around February.

But,today, the market over-reacted, and I expect to see some upward bounce in the market. I look to see the Dow around 10500 by the end of the year.

Some of you are braver than me, but I would coninue to avoid anything remotely related to financials right now. I like them, but that is not where I would put money. I would still look for two things as I pick stocks right now. Well, three, but the first goes without saying. Never invest in a company unless it is sound, being in a good market segment, with a good balance sheet, and a promising chart, and P/E. Second, is continue to look for good dividends, and third is invest in companies that have long delivery timelines.

Companies that need large capital for investments, will be doing little growth. Shipping comes to mind, The cost of ships will make new orders hard to come by. Yet,dry bulk shippers using existing ships should continue to weather the finacial storm fairly well. At some point though, they will have increased dry dock expenses.

Incredibly enough in all of this, the dollar is strengthening. As the dollar strengthens, so will gold, silver, and other precious metals. This will make some mining stocks very attractive.

And the last thing I want to mention is that companies have not let the deteroration of stock prices go unnoticed. I expect many to be looking for creative ways to increase values to shareholders. This could be in large stock buybacks, one time dividends, and for a few maybe even stock splits. I even expect some renewed interest in mergers and acquistions to start early next year, in sectors outside of financials, and not because they are distressed, but because they are of investment quality.

But, one way or another, the market panic shown today, will end, and soon.

Comments: View Comments |  Monday October 6, 2008