The Next Leg… Down?

Some Investment Advice

Looking at the big picture, something I do often, one recognizes that the world ain’t all that it’s made out to be. I have a heavy hunch (based on educated analysis) that the stock market rally won’t last another month and that another wild flight to safety is about to begin.

But what would set this off? So what if companies are overvalued for the moment? Buy and hold would still pay off over the long term. Even (perma-bull) Jeremy Siegel will tell you, had you bought after the rout in 1929 when the Dow fell over 50% – even before the next 60% leg down – you’d still be making a profit by the following year, and by 5 years out you’d be looking at gains over 7% annualized. Not bad you say!

But as the old man in Jesse Livermore’s pub would tell him “In bull markets you buy, in bear markets you trade”. And this is no bull market. Not by a long shot! But who says this bear market rally is over?

One must remember that the sentiment changes drastically between super bull and bear market decades. In bull markets its all about competition, about the best stock tips, about the nicest home in Monte Carlo. In bear markets, it’s about your skin, about not losing as much and about being able to make rent or payroll.

While the speculative cards have all been set out on the table, the actual dealing has yet to begin on a grand scale. Corporate bankruptcies will rise, and with them, some of the greatest companies of our time. So far, this has mostly been in the financial sector; Bear Sterns, Lehman and a pileup of of small banks. But what about infrastructure, manufacturing, retail? Not to mention more commercial real estate losses.

It seems that together with people’s loss of fear for Dow 6,800, they have also lost all sensitivity to the fact that their companies may not make it all together. In bull markets there are companies that do well and those that do better.

In bear markets there are also two types of companies; those who make it and those who don’t.

“Caveat Emptor” (Buyer Beware).


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