A lot of folks have been asking me lately whether I believe we’ve reached the bottom of the bear market. Certain technical indicators would seem to suggest so. We retraced October’s lows and then bounced back last week after a big rally on Thursday; technical analysts would say that this is an historical point of every bear cycle, the point at which the market tests previous lows and then begins to move markedly upward, thus ending the bear market.
But nothing about this bear market has been historical.
From a macroeconomic point of view, next year is shaping up as one of the worst in recent history. We could be looking at severe economic contraction for at least two quarters, and perhaps the entire year.
In such an environment, the proof is in the earnings. If I were an investor currently sidelining a lot of cash, I would keep it out of the market until the late December and January 2008 earnings reports start to roll in. My feeling is that the earnings projections from Wall Street’s analysts are going to be way off. As discussed over at SeekingAlpha this morning and this weekend at The New York Times:
“While profit projections have declined, they may still be way too bullish. According to a survey of analysts by Thomson Financial, earnings growth estimates for S.& P. 500 companies in 2009 have fallen well below the rosy 22 percent forecast at the start of October. Still, they’re expecting corporate profits to grow more than 12 percent next year. Since many are predicting a difficult first half of the year, thanks to the weakening economy, this would assume a tremendous profit surge in the latter half of 2009.”
Given this, your decision to invest should be tempered by your life situation. If you’re relatively young, I would contend that you should be fully invested – all the time. If you are a retiree living on a fixed income, you should naturally be more wary of market movements and market risk.
In any event, if you are planning on buying stock based on the still-rosy earnings projections for Q4 2008 or Q1 2009, you might reconsider. These earnings estimates are no more reliable than financial industry dividends, which are being yanked company by company from common stock investors.
My sense is that, since analysts don’t do their analysis in “real time,” they tend to get their projections wrong in times of great macroeconomic change…potentially way wrong. Before buying stock in a company, you need to really consider whether the company’s earnings are “recession-proof,” particularly if the company has a weak balance sheet where the debt burden could become unsustainable during a year-long economic contraction.
No comments:
Post a Comment