Groping in the dark to find a real bottom
Posted on 23 December 2008 with no comments from readers
You know I think Warren Buffett was wrong when he called he market bottom in mid October. As this blog argued yesterday there are the hedge fund redemptions from the year-end to fuel a big Q1 sell-off. Marc Faber thinks the US economy will implode early next year.
Indeed, with the S&P down 40 per cent this year there is quite a lot of downside to play with. Q-theory posits another 55 per cent fall to the bottom but we are all groping in the dark on this.
Auto deadline
It could be that the March deadline for the big auto US firms to come up with a viable recovery strategy will mark the bottom if these companies all end up in bankruptcy. It is perfectly possible that this might be the only way to restructure the US auto sector but the stock market would clearly take fright, with much justification.
Certainly anybody sitting on cash and thinking about venturing back into the market might like to think again. Even great companies at great stock prices can get cheaper in a sell-down, and they are not about to get more expensive in that environment.
Second-guessing Buffett
Now Buffett’s famous article in the New York Times did have an escape clause, in that he said now was a good time to buy but he could by no means be sure that the market was at the bottom or when it might get there. But the world’s most successful investor said he was buying himself, though not who or how much.
Personally I feel extremely cautious going into the New Year, and am prepared to wait this one out in cash and precious metals. If that means missing the bottom then fine, I am not Warren Buffett. But if things take a really nasty turn then I will be in there buying, and throw some caution to the wind. I just do not feel the moment is right just yet.
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From The Daily Mail today:
Asked by the Evening Standard to predict a target for Footsie at the end of 2009, Goldman Sachs, Merrill Lynch and JPMorgan were just some of the firms who declined to comment. The banks may still churn out buy, sell and hold ratings on individual shares every day but it seems they don’t want to give their views on the overall market.
This is what Lehman Brothers had to say last December about why there wouldn’t be a serious economic downturn in 2008: ‘Back in the early 1990s, along with a recession in the housing market as well as the wider economy, with sterling pegged to the German mark, interest rates were unable to respond. This time round we think the outlook for the UK market is encouraging.’
Lehman’s prediction for the Footsie at the end of December 2008 was for the index to close at 7300. That’s about 3000 points higher than it currently stands and a sign of where the bankrupt bank began to get its sums wrong – although Lehman analysts were not the only ones to be so bullish.