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Grim news from over the water on rumour Countrywide financial could be seeking bankrupcy protection :-


....mmmm...that would put the skids under the market.

However, the link actually says that Countrywide

....on Tuesday denied market speculation it might seek bankruptcy protection, after shares of the largest U.S. mortgage lender slid to their lowest level in nearly eight years.

"There is no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the company," Countrywide said in a statement.

- just another sign that the stock market, like the Presidential jousting, is starting to get very dirty! In the present environment, rumours are just as effective as facts in getting the market going the way that some of the larger trading houses [You know who I mean!] want!

Can't disagree with this conclusion though:
The news is sure to have a negative affect on the UK markets when they open Wednesday. I expect further downside pressure on all banks. Loans are drying up day after day and all this will impact on the wider market. Best avoid high debted companies this is expected to continue for a while yet.

There is some danger that this might all get completely out of hand for the financials. We aren't there yet and perhaps there is some genuinely bad news in the pipeline for one or more of them - but if bad news of this type actually does emerge then we might soon see the complacent punters in the financials starting to genuinely panic [which may of course mean that a buying opportunity for the brave emerges earlier than I've hitherto thought....though perhaps at lower prices?]

ee

Yes, Countrywide denied the rumour but if one takes any credence of a chart holding some predictive power this down ski slope is interesting:

http://finance.yahoo.com/q/bc?s=cfc&t=6m

Late last year I tried to short them, but there was no stock to borrow. But some guys have done real well out the fall, just as some folk did with Northern Rock.

As far as I know CFC is one of the largest US mortgage lender in the US along with its other activities:

Countrywide Financial Corporation, a holding company, engages in mortgage lending and other finance-related operations. The company operates in five segments: Mortgage Banking, Banking, Capital Markets, Insurance, and Global Operations.

The CEO makes $23million and seems to have a lot of shares.

We have a business going from a market cap of about $24b to today’s $3b in just 52 weeks.

Rather a large bit of depreciation that. Several months back folk who said things were as bad as the 1930's were laughed at, but...

What now?

Dunno, the market is all getting oversold and of course the Fed might act before its next meeting.

But will interest rate cuts now do anything for the US stock market, save a very temporary rally?

One might get to thinking that things are getting out of hand and that there could be some really unhappy days coming, maybe several hundred of them, one after the other.

Regards,

As I mentioned in an earlier post, share prices will bottom before the newsflow bottoms.

Every man and his dog can work out there is more bad newsflow to come for US home builders, retailers and financials. The same is likely the case for the UK.

But what no man and no dog can work out is when stock prices in many of those companies might bottom.

Are we there yet (as my kids say 2 minutes after we've left home on a 2 hour drive)?

I suspect we are getting closer to the bottom for some share prices. We may not be there yet, as these corrections normally take a while to work through the system, and just as share prices normally overshoot on the upside, they normally undershoot on the downside too.

Also, we are yet to see any real sign of capitulation. There usually comes a time when traders say "enough is enough" and they sell indiscriminately, regardless of common sense and valuation. They want out, whatever the cost, and they want out now.

We had one such day in August 2007. We had another in March 2003. The latter is more relevant to today, because it came at the end of the 2000-2003 bear market.

The best case economic scenario is a soft landing in the US and UK. Most economists are sitting on the fence when it comes to whether the US will go into recession or not. Yet, the stock prices of many companies are already priced for recession.

Despite that, my expectation is that stock prices haven't yet hit bottom, mostly because we haven't had that capitulation day. It may not come, but it usually does.

The real bears may point to the 2000-2003 bear market and say we are still 2-3 years away from the bottom of the share price market, because this bear market hasn't really even started in comparison.

But this bear market has been going for a while. It's been going for a while in financials, retailers, home builders and generally in smaller companies. The indexes haven't moved as much because they've been held up and even boosted by the large mining stocks.

Now if the mining stocks started getting hammered too, we'd likely see share markets in somewhat of a freefall. But that is a different story.

I just get the feeling that we may not be too far away from the day of capitulation. It might be 1 day, 1 month or 3 months, but that is not too long to wait for the bottom.

Happy investing,
Bruce

Yes, we may be near a bottom, but let us not forget that there has been some serious losses here.

Back in August Bank of America pumped $2b in to Countrywide at an effective $18/share:

http://www.msnbc.msn.com/id/20398335/

That $2b is now worth something like $600m.

Unlike assets which can evaporate, losses and debt can’t.

It may require some big names to go bankrupt before we bottom. This is now both a wall street and main street problem, somewhat different to many previous market corrections.

Regards,

Hi Bruce,

Also, we are yet to see any real sign of capitulation. There usually comes a time when traders say "enough is enough" and they sell indiscriminately, regardless of common sense and valuation. They want out, whatever the cost, and they want out now.


This is the bit of the whole market tone that bothers me. We certainly haven't yet seen any real sign of capitulation, have we?.....

....instead what we have seen is a steady stream of retail punters trying to call the bottom in the financials [in particular] and complacently pointing to the historic metrics whenever anyone suggests they are a bit too early.

Meantime, as you say:
....this bear market has been going for a while. It's been going for a while in financials, retailers, home builders and generally in smaller companies. The indexes haven't moved as much because they've been held up and even boosted by the large mining stocks.

....but its generally been the case of grinding lower, interspersed with rallies - most of which seem to me to actually be in the classical defensive stocks in fact, though financials and builders etc have also had their days. Smaller companies have got thumped and, in general, so has the FTSE250 compared to the FTSE100. In addition, whilst I don't track the miners, it seems to me that the oils have certainly lagged the fundamentals....this Barclays research [thanks to Terry for the link on the O&G markets board] makes the points well (compare whats happened to a selection of shares in the last three months) https://ecommerce.barcap.com/research/user/article/attachment/himlb3j5d1gneoridtj74ro/0/Oil%20Sketches%20Monthly%208%20Jan%2008.pdf

Towards the end of last year, I was thinking that the market would try to rally in January and that we'd be waiting until perhaps the summer for the capitulation selling. Now I'm not so sure - certainly every rally attempt seems to be getting smacked back down again. Maybe we get a panic earlier......or maybe it just turns into a classic bear market and grinds lower and lower for months on end, with no capitulation for a long time yet?

Its very tough to call [as one would expect!], but on balance I think you may be too optimistic here:
I just get the feeling that we may not be too far away from the day of capitulation. It might be 1 day, 1 month or 3 months, but that is not too long to wait for the bottom.

We are now in an election year in the US.........and in the last two election years [2000 and 2004] the US market stayed remarkably flat, as if some hidden hand was keeping things "nice and steady" [surely not? Ed]. Will this happen again, or will a slide in the indices be engineered to become an election issue ["you can't trust the Democrats" etc etc??......though of course the markets were massively bullish througout the Clinton era - "Its the economy, stupid"]? Time will tell - but I do think that trying to call a bottom so soon is a very risky approach when uncertainties look likely to continue for some while yet!

rgds

ee

...but India's Sensex continues to power ahead, hitting a new record high this morning. See http://finance.yahoo.com/q/bc?s=%5EBSESN&t=3m&l=on&z=m&q=l&c=

Must admit I've reduced my exposure (via JP Morgan India Investment Trust, JII), freeing up some cash as I do wonder whether we're going to see an almighty correction in emerging markets before too long. Also reduced Baring Emerging Europe IT (BEE). OTOH, will the BRICs come to the rescue of the Western capital markets and those businesses trading with them?

Politically, it's interesting that Indian markets seem to be shrugging off worries about their neighbour Pakistan, that are exercising Western concern and boosting oil and gold (according to the media).

Interesting times indeed.

Regards,

Mark

The real bears may point to the 2000-2003 bear market and say we are still 2-3 years away from the bottom of the share price market, because this bear market hasn't really even started in comparison.

That would be me then.

But this bear market has been going for a while. It's been going for a while in financials, retailers, home builders and generally in smaller companies. The indexes haven't moved as much because they've been held up and even boosted by the large mining stocks.

Financials have been dropping because they've been caught selling dodgy twenty pound notes, not anything to do with the economy. Apparently, the problem is so bad that a lot of them may be forced to undergo rights issues in order to support their balance sheets. Probably not though, 'cos it's only the Yank Banks that have been hit by the crisis, honest Guv.

We are nowhere near capitulation if this is a proper bear market beginning. Have you forgotten what a recession looks like? I know many people are hoping for a mild or "technical" recession but these same people were hoping for no recession at all. Given debt levels, inflated housing levels and inflation concerns at the same time, I really can't see any justification for current stock price levels here or in the States. Proper recessions mean people losing their homes and jobs, not cutting back on their Chrissie presents.

WShak

I suspect we are getting closer to the bottom for some share prices

But this bear market has been going for a while. It's been going for a while in financials, retailers, home builders and generally in smaller companies. The indexes haven't moved as much because they've been held up and even boosted by the large mining stocks.


Apart from the financials no other sector is pricing in economic slowdown (with the exception of retail which seems to have woken up to it in the last few days). Most forward earnings forecasts are probably too optimistic. We ain't seen nothing yet.

We are now in an election year in the US.........and in the last two election years [2000 and 2004] the US market stayed remarkably flat, as if some hidden hand was keeping things "nice and steady" [surely not? Ed]. Will this happen again, or will a slide in the indices be engineered to become an election issue ["you can't trust the Democrats" etc etc??......though of course the markets were massively bullish througout the Clinton era - "Its the economy, stupid"]? Time will tell - but I do think that trying to call a bottom so soon is a very risky approach when uncertainties look likely to continue for some while yet!

The above statement and the general thoughts expressed in this thread make me more convinced than ever that my policy of selling FTSE index calls will continue to be a good plan for some time yet. See my theory explained here:

http://boards.fool.co.uk/Message.asp?mid=10441012&bid=51144

Since writing that last March I have kept on writing FTSE Index calls monthly and this has been a nice little earner so far! I never quite understood W Shak's point (in the above mentioned thread) that he didn't like selling FTSE calls during November to February - maybe I am about to find out!
Happy New Year to all!
S

Have you forgotten what a recession looks like?

Most people haven't seen a proper recesion or if they have it's now a very very distant memory. I'm also starting to worry re this now.

Hi Shenken,

Since writing that last March I have kept on writing FTSE Index calls monthly and this has been a nice little earner so far! I never quite understood W Shak's point (in the above mentioned thread) that he didn't like selling FTSE calls during November to February - maybe I am about to find out!

I've been selling FTSE calls on the market for absolutely yonks now and it has helped me see through selling periods like now many times. I generally don't like selling them between November and February because of the positive seasonal effect. This year, I sensed it wouldn't arrive since share prices were already so high so I sold my monthly calls as usual. I was contemplating buying some of them back since we must be due a bounce in the States, but with every intention of selling into the rally again.

WShak

FWIW, I'm with WShak here.

Despite a poor year in 2007 (because I wasn't heavily concentrated only in oil and gas) I still made 7% or so, but it was a struggle. But it didn't feel like a market in panic, or anything approaching capitulation. In fact for most of the year (the first three quarters) it felt to me like 'business as usual'.

it's possible to argue that we might muddle through, but the emerging information on just how the economy has been sustained during the last decade (excessive personal and government borrowing and falsified bank balance sheets) suggests that we could see a real downturn. In that case IMHO the best possible outcome would be a cathartic 1987 style drop in the market here and on Wall Street (say 40% in a week), followed by rebuilding.

I doubt we'll be that lucky. I fear it'll be slower, take a couple of years to reach anything like a base, and offer share bargains that we can't even imagine right now.


KMcK

Hi KMcK,

FWIW, I'm with WShak here.

FWIW, I've been a bear since 2000 so my opinion isn't really worth much.
What I do know is that constantly expecting a recession hasn't stopped me from making a living in the stock market since it just means that I'm selective in the stuff I'll invest in.

BertEE,

Can't remember 1990? I'm feeling old now ...

WShak

I was 15, no I was too busy watching Dukes of Hazard and the A-Team. ;o)

That's worrying. I was 23 and watching the same. :o)

WShak

1990. No T+3 then. There was a 2 week-trading settlement on FTSE stocks obviously many years before SETs so trades didn't settle for quite a few days and any selling before settlement matched the 'buy' trade on 'settlement day'. Things have a changed a lot!

Hi W Shak
I generally don't like selling them between November and February because of the positive seasonal effect.

Thanks for your thoughts - I had been curious about your reasons and wondered if there was some deeper meaning behind the remark.

All the best
S

Hi ee,

instead what we have seen is a steady stream of retail punters trying to call the bottom in the financials [in particular] and complacently pointing to the historic metrics whenever anyone suggests they are a bit too early.

I must be missing a trick or something. I thought the general idea was to buy shares cheap and sell high. For me that means buying on the way down and holding or selling on the way up. It's not about calling the bottom - that's impossible. I have been unashamedly buying finacials, retail and housebuilders for the past 6-months. Easy in hindsight to say I started too early but at the time they looked good value. Now they look even better value so I'm still buying. In a couple of years time other sectors may be out of favour so I will buy those.

My SIPP portfolio is all red - apart from Vodafone which I bought 12-months ago at 130-something when it was out of favour. Every time I buy something the price seems to drop further. But my portfolio average yield is now a touch under 6% on last year's figures, with generally good cover. So there must be a fair safety margin built in there somewhere. Sure prices may go lower over the next 6 months or so but I know as sure as day follows night that they will rise again. In the meantime I'm building up a portfolio of hopefully sound companies bought at attractive prices (tho' not the cheapest) that will pay good dividends.

I think the basic problem highlighted by your statement above is that your're trying to absolutely maximise your investment returns. That means buying at the absolute bottom. I've managed this very few times (and then it was purely luck) and it does feel great. But now I set my sights lower and simply try to achieve reasonable returns. I find that a lot less stressful and I'm probably doing just as well as previously. You don't have to buy shares at the absolute bottom - you just have to buy when they're cheap.

You don't have to buy shares at the absolute bottom - you just have to buy when they're cheap.

True - but right now you don't know if they ARE actually cheap. They may merely be just cheapER....and that not the same thing at all!

ee

Globalarb

Apart from the financials no other sector is pricing in economic slowdown (with the exception of retail which seems to have woken up to it in the last few days). Most forward earnings forecasts are probably too optimistic. We ain't seen nothing yet.

Really?

How about some of the engineering stocks?

I know Im like a dog with a bone here but how about say Keller?

Globally diversified, 6 months EBITDA worth of debt, trading statement on 20 Dec:

http://www.investegate.co.uk/Article.aspx?id=200712200701063324K

Keller Group plc ('Keller' or 'the Group'), the international ground engineering
specialist, is providing the following routine trading update in advance of its
results for the financial year ending 31 December 2007, which will be announced
on 3 March 2008.

We have continued to see strong overall trading and accordingly, the Board
believes that the Group's results for the year will be slightly ahead of the top
end of the range of market expectations.

Our withdrawal from Makers is progressing well and the associated one-off charge
in the second half of this year is still expected to be less than £10m, as
indicated in our interim results announcement in August.

Orders in the second half have been good and all four of our geographic regions
currently have higher order books than at the same time last year.

Justin Atkinson, Keller Chief Executive, commented:

'2007 will be another excellent year for Keller and our strong order book leaves
us well placed for 2008.'

So for the year just ended earnings will be slightly in excess of the mkt so with the mkt saying 91p lets go for 93p shall we?

Share price on 20 Dec 661p

Share price today 522p.

So that would be a historic PE for the year to end 07 of 5.6 with trading still strong.

Tell me that isnt nuts?

How about others - CHTR for example or Hamworthy or Kier or..... hell there's a lot fo Mid 250 names with excellent records, astute management, solid finacials and PEs that simply look nuts now (though KLR looks the most extreme to me at the moment). There is simply no interest in the mid cap stocks at the moment everyone is looking to increase cash positions and its brutal.

Id say that we are seeing capitulation in some areas or rather the first stage of capitulation. Ive been like WShak, a bear for a while now, hence my big positions in oils and gold. What we're seeing is the flight to quality - the rush for the defensives and the mega cap stocks. Thats the first stage, next we see some disappointing news on the defensives. I dont know what that might be, Im not buying utilities at these prices - there's a high likelihood IMO of government changing pricing regimes in the not too distant future so that will whallop some. Thats when we see the big falls as the mega caps and defensives get sold off in favour of cash.

Me, I think we will see the FTSE at 5500 during the year. Then again Ive said this over the past couple of years. We got there (almost in 06) and pretty damned close during 07. This is a bear market at the moment just one disguised by the miners and the giant oilies (which I dont hold). Augst last year saw the miners get hit hard as sentiment shifted. Okay we saw them recover (and I was a buyer when the falls looked overdone) but I dont doubt that we will see sentiment switch and that the mega cap miners will see similar falls again. Where will this take the FTSE?

Sorry all, I lost my train of thought whilst typing due to several phone calls interrupting me. I hope it makes some sort of sense.

D

I know Im like a dog with a bone here but how about say Keller?

I've not looked at Keller. I know that plenty here have. The lower the shares go the more grounds there seem to me to worry that something has been overlooked. Is there a legal claim somewhere? Does the balance sheet need more shoring up than it might seem at first sight? I've no idea - but the price movements suggest that someone thinks otherwise!

What we're seeing is the flight to quality - the rush for the defensives and the mega cap stocks. Thats the first stage, next we see some disappointing news on the defensives. I dont know what that might be, Im not buying utilities at these prices - there's a high likelihood IMO of government changing pricing regimes in the not too distant future so that will whallop some. Thats when we see the big falls as the mega caps and defensives get sold off in favour of cash.

Me, I think we will see the FTSE at 5500 during the year.

All very good points, especially re the dynamics of sector switching in a bear market! I wouldn't rule out FTSE sub 5000 if things really turn ugly.

ee

Hi ee,

True - but right now you don't know if they ARE actually cheap. They may merely be just cheapER....and that not the same thing at all!

But on that basis you never know! The future is never known for certain so all you can do is rely on other factors. I use yield predominantly, provided there is a history of reasonable growth, it is well covered and debt is sensible. What you and other bears are using is information about the macro-economy and extrapolating from there. I'm not arguing with that. I'm reasonably certain that things are going to get worse before they get better (in fact they already have been for 6-months). What I'm saying is we don't know how bad or for how long - and this is what will affect the share prices in the sectors I'm buying. All I know is that in 10-years time I want to have some banks, some housebuilders and some retailers in my portfolio. Today may not be the absolutely best time to buy these but based on my criteria it still looks pretty good to me.

Today may not be the absolutely best time to buy these but based on my criteria it still looks pretty good to me.

I don't need to remind you, kiwi, that you said much the same when you were buying NRK.....

Be lucky!

ee

I've not looked at Keller. I know that plenty here have. The lower the shares go the more grounds there seem to me to worry that something has been overlooked. Is there a legal claim somewhere? Does the balance sheet need more shoring up than it might seem at first sight? I've no idea - but the price movements suggest that someone thinks otherwise!

Charter tells a similar story - I was talking to Hal about stocks that have an exposure to refinery manufacturing, as this will be, IMO, the last growth area to get hit, if at all. Nevertheless, down it goes.

All I know is that in 10-years time I want to have some banks, some housebuilders and some retailers in my portfolio. Today may not be the absolutely best time to buy these but based on my criteria it still looks pretty good to me.

10 years is a looong time. My own portfolio gets 100% recycled at least 2 to 3 times in such a period. If I look back 4 years, I had almost no exposure to E&P, plenty in retail and a some in banks, and no shorts at all. Now is almost the opposite (although am thinking of buying back my retail shorts)

although am thinking of buying back my retail shorts

After some swithering over the past few days about which retailers to short, I gave up this morning and just shorted the Retail FTSE350 Index. If M&S are getting f**ked then I suspect the whole sector is really in trouble and i don't need to be too selective about which retailer to pick. Time will tell...

BC

Hi All,

An interesting thread. One must be getting old when you find out that respected Fools are a lot younger than yourself!

I suffered a bit in the last recession (91/92), so I'd like to query a couple of the points made so far.

1) The last recession was in part fabricated by the government of the time (nuff said) to stabilise the economy, and unemployment was used as a tool (via interest rate rises) to control inflationary pressure (i.e. wage demands). Although it is not all hunky dory on the streets, I don't perceive unemployment being a particular problem at the moment.

2) IMO rising unemployment caused the recession. Maybe there has never been an event where there isn't high unemployment in a recession, and this time it will need to be reclassified since many people have multiple jobs, and many jobs are shared.

3) I don't think there is a correlation between the level of the FTSE and a recession. If I remember correctly the financial markets were in rood health during the depths of the recession. If there is a correlation then we could be looking at the trigger for a recession that will kick in in a couple of years time.

4) There is latency in a downturn,. and perhaps that is all that is being witnessed now. Discretionary spending is put on hold until it becomes less discretionary. For example, cars. If I remember correctly from last time it was new car sales that signalled the depths of the recession, not second hand car sales. There were intially less new cars being bought, this led to a restriction of supply of second hand cars after a year or so, and prices of second hand cars remained steady at the more affordable end of the scale.

5) If there is to be a recession, there is also the Olympics to consider. Many commodities bulls think that the Chinese Olympics have been a driver for the current commodities bull run. It will be a huge engineering project to get the UK ready for the next olympics, and we will also need people as well as providing comfortable income for many companies. I have a feeling this will be our get-out-of-jail-free card.

Rich

Have you forgotten what a recession looks like?

Well I remember the 90's recession very well, in the UK was a bad recession. Maybe this one will be as bad, maybe not. I've been a property bear for too long now, but I'm not as bearish on large cap stocks, here why.

Looking back to the early 90's big recession what was the top to bottom maximum fall? Its about 10% maybe 15%. We've had 10% off already. Reading some of the vocal bears around here you'd believe a recession means a guaranteed bear market, its not always so.

The biggest bear markets have been after big speculative peaks. Remember the eighties thatcher boom? EM in the mid nineties? Dotcom mania? Everyone was falling over themselves to buy. When the music stopped we got -20%, -40%, -50%. Big falls.

Sure, in 03 to 06 we had a big run up. Was is speculative fever or just a buyback after being over sold? I don't think many people have been dying to buy. With the global boom and loose liquidity stocks are barely higher than they were 10 years ago. I don't think 2007 was a year of speculative fever from where we're due a correction.

I would favour big caps over minnows, and avoid retail. It has been a long time since the average guy on the street has seen a recession, it is going to hurt a lot of people. But most UK companies are international giants, not your local corner store. Much is priced in already, I don't think investors should run scared.

Lastly the sterling has been weak and I think will get weaker. Big global stocks should rise in GBP when the GBP sinks.

The average consumer hasn't seen a recession and wont know what to do. The average investor hasn't seen a recession either, they're panicking. Its probably too late to cut and run, I'm keeping my eyes open and keeping investing.

what vehicle did you use to short it?

SB with IGIndex

Hello bob,

Well I remember the 90's recession very well, in the UK was a bad recession. Maybe this one will be as bad, maybe not. I've been a property bear for too long now, but I'm not as bearish on large cap stocks, here why.

Looking back to the early 90's big recession what was the top to bottom maximum fall? Its about 10% maybe 15%. We've had 10% off already. Reading some of the vocal bears around here you'd believe a recession means a guaranteed bear market, its not always so.

The biggest bear markets have been after big speculative peaks. Remember the eighties thatcher boom? EM in the mid nineties? Dotcom mania? Everyone was falling over themselves to buy. When the music stopped we got -20%, -40%, -50%. Big falls.

Sure, in 03 to 06 we had a big run up. Was is speculative fever or just a buyback after being over sold? I don't think many people have been dying to buy. With the global boom and loose liquidity stocks are barely higher than they were 10 years ago. I don't think 2007 was a year of speculative fever from where we're due a correction.

I certainly follow the argument here and am pretty sure that it would be widely agreed with amongst institutions. The absolutely key unknown, though, is the extent to which the forced deleveraging that is being driven from the banking and currency markets, via the hedge funds, will damage the prospects for the real economy. I don't pretend to know the answer - but I do know that there is a serious risk that it will be different this time, because this is a new and very large factor that we simply haven't seen before!

One of the reasons to fear a protracted bear market, IMO, is precisely the sort of argument you highlight - because on the face of it there is nothing "bubbly" about the market today - and so people happily argue that stocks are cheap and keep buying into the dips. However, these effects will take a long time to work through - and my worry would be that, rather than seeing a pick-up in the second half of the year, what we will ultimately get will be a series of disappointments, which will eventually knock the props out.

It is certainly possible to make a case out either way on the issue above, but the point that I would come back to is: what is there that leads people to think that the equity market will "automatically" bounce back and recover? I can certainly accept that it is possible that things may not turn out to be as dire as I and others fear - but I don't see a case for expecting equities to generally outperform other asset classes because this surely subsumes the idea of a fresh round of strong economic growth.......so the "best case" for equities seems to me one where returns remain marginally positive......

....which IMO doesn't compensate for the risk that the worst scenario [say, FTSE down 30% in the nest year or so] might yet come to pass.

Anyway....I guess the markets won't be dull ;-)

rgds
ee

and so people happily argue that stocks are cheap and keep buying into the dips.

The last 3 months have seen the longest net outflow of retail investors in history in the US. UK looks similar, retail investors finally throwing in the towel on their beloved banks. The press is spewing out pessimism non-stop. Leveraged longs are getting margin called and hedge funds re renewing their shorts. Remind me who is buying again?

I do agree that a massive deflationary credit cruch ala Japan is a risk. If that does happen we are going to see interest rates slashed. If we get a crunch there will be no inflation so that isn't a worry, commodities will tank. If USD is yielding 2%, GBP 3.5% again you could take 50% off earnings and still be comfortably ahead of bond yields.

My main point is the correlation between economic growth and stock prices hasn't as strong as you'd expect. Even if we do get a recession that doesn't mean a 30% fall coming up.

I know Im like a dog with a bone here but how about say Keller?

I agree with all you say about Keller, however have you seen the comment posted on Advfn

Citigroup downgrades Keller Group (KLR.LN) to hold from buy on the potential of an economic slowdown. Cuts '08 EPS forecast to 95.4p from 99.1p and '09 top 82.5p from 103.8p. Sees a further 10% downside to '09 EPS estimate in the event of a US recession and a 30% downside in a US and European recession. Says the group is cyclically exposed but notes it is protected by its wide geographical spread. Lowers price target to 700p from 1150p

Assuming its true (I haven't seen the original source) I don't know if that reflects any discussion with management or if its just Citigroup speculating (analysts have been known to get things wildly wrong in the past). On the flip side we have comments from Keller backed up by director share buying. Of course even if Citigroup's dire warnings are correct then Keller would still be trading on a forecast 2009 EPS of 9.3. Most of any bad news seems well in the share price.

Precisely.

At these sort of prices and assuming a very significant downturn then the shares are still cheap surely?

Madness I tells ya.

The biggest bear markets have been after big speculative peaks

Hi Bob,

Like you, I don't think we have seen a big bubble in equities.

But there has been big speculative movements in other assets, notably residential property and, dare I say it, commodities. I won't mention the o-word, but if you look at gold, the chief driver of the gold price is investor demand (not supply constraint, not industry demand) and investors want a lot of gold. The clever bods in the City have responded and have set up ETFs so people can indulge their love of the shiny stuff. The good thing about ETFs, of course, is that they allow an additional vehicle to short the price of gold ;)

So, we might see a bear market soon, but it will be in BTL properties (I think this one is underway) and commodities of various kinds. I also think the bear market in property will seriously disappoint the denizens of Property - Market & Trends, because the price decline of desirable properties is going to be gentle and the majority of them will still be unable to afford the Chelsea shag pad they have their eyes on.

I've just got back from Oz, and the residential property bear market they had there has evaporated. Voids have plummeted to all time lows and landlords are forcing tenants to bid up rents.

As for commercial property, I think this will hold up pretty well. There is a huge difference between now and 1990. In 1990 there was a massive, massive glut in commercial property, this time there isn't and vacancy rates are low.

Anyway, that's enough of this macro nonsense. Anyone know anything about shares?

The biggest bear markets have been after big speculative peaks. [bob342]

Hmmm. You seem to have forgotten that there was a full bear market (-40% or so) in FT100 "defensive" and "value" stocks at the height of the dot.com boom (late 99, early 00) and you could buy RIO at -£10, RBS and BATS @ £2.50, Anglo-American at -£7 and BG at -£2 (to take just today's top10 of the FT100).

Too many Negative Waves Moriarty, less of the Negative Waves.
Self fulfilling.

emptyend:
...instead what we have seen is a steady stream of retail punters trying to call the bottom in the financials

Whereas today, it's a steady stream of financial punters trying to call the bottom in retail...

Hello Kiwi,

You said :

I must be missing a trick or something. I thought the general idea was to buy shares cheap and sell high. For me that means buying on the way down and holding or selling on the way up. It's not about calling the bottom - that's impossible. I have been unashamedly buying finacials, retail and housebuilders for the past 6-months. Easy in hindsight to say I started too early but at the time they looked good value. Now they look even better value so I'm still buying. In a couple of years time other sectors may be out of favour so I will buy those.

My bolding

That's quite a compelling argument and in the right context can certainly be successful. (I think you've taken a significantly more cautious approach than when our paths first crossed a few years ago - as have I, although to your credit you achieved this enlightenment earlier than I did.)

However, one of things I remember several Fools trying to get through to me in the early days (especially if IIRC - the excellent Steveclarke100 who sadly seems to have left us) is that it is better to buy on the way up rather than on the way down. It took me an awful long time to take this on board - and even now I'm not totally sure that I'm converted.

You accept that you can't call the bottom - wise indeed IMHO - and are therefore content to buy 'on the way down' when shares look unreasonably cheap.

But why not instead buy when the green shoots of recovery are becoming apparent - IE on the way back up.

There are a couple of reasons I can think of (both of which have a past resonance that I'm trying to shake off).

(1) You can postpone buying almost indefinitely waiting for an unmistakable sign. Just as it's impossible to call the bottom, it's bloody hard to call the turn (other than with the benefit of a few quarters of hindsight)

(2) A worry that the turn will be abrupt and that you'll miss it - the market change sentiment before you realise it and you'll miss out on a substantial rise whilst you catch up. It's very compelling and indeed sometimes I have benefited from buying before the turn, at least as often I've been 'punished' for buying too soon (and on occasions, later information has told me that there won't be a turn.) In truth there's a danger that rather than accepting you can't call the bottom you're actually subconsciously trying to do just that, with all the risks it entails.

Truly I can't dispute the idea of buying some badly marked down companies now for the long term if you are **CONVINCED** that they will neither go bust nor be mortally wounded by the downturn. Over the long term as you suggest this should be a winning strategy.

However, I'd now look at it this way :

What do you loose by waiting?

> Rather than buying now at 5% off the bottom (if you're lucky) or the very bottom (if you're even luckier) you might have to buy at 5-10% higher if the market recognises the inevitable upturn before you do.

But of course you're not interested in calling the bottom, just in buying cheaply so that should be a problem, should it?

To get a bit vaguely macro now - I don't see any reason to believe that there will be a sudden recovery in the markets that you'll find it difficult to catch. IMHO the slowdown that we are seeing will take a while to fully catch hold and depression and fear will grow over the course of at least the next six months (probably longer) - It seems to me that as and when a recovery does come it will be gradual and that realisation of it will lag the reality. So I think the will be plenty of time to catch the rising wave.

What do you gain by waiting?

> Well as above - although I recognise that both are very difficult - I think it will be easier to catch the turn (in sentiment) than to catch the bottom as such.

Obviously there is the off chance that we will see Bruce's heralded capitulation and be able to act on that, but I'm less than convinced that it will be so easily apparent at the time. (For example whilst Bruce sees a possible start of capitulation in the reaction to the M&S results - I personally see no reason to believe that the reaction won't get worse and the M&S will get sucked into a doom & gloom decline for a significant number of months.)

FWIW - I'm more concerned about the consumers directly than the structural effects of the credit squeeze (although I know they are related), circumstantial evidence suggests to me that there are still a significant body of consumers that have not yet been fully hit by interest rises (fixed rates and all that) and have therefore yet to rein in their spending, so I think that there is more slowdown to come and that it will still be something of a trickle. Whilst it's true that retailers (those that survive) will cut their cloth to meet the market - I'm very tempted to wait for that to produce results before I consider the bottom to have been found. (For many companies the consumer downturn has the potential to have a far more marked downturn in NEXT years results than this, and these will remain a mystery for at least the next few months)


> Moving on, and perhaps the most compelling benefit from waiting is that rather than presuming that your chosen investment will be one of those that survives you'll get the chance to see the real evidence. It's easy to presume that large companies with established brands will be the survivors but sometimes the casualties or walking wounded come from surprising quarters - so unless there is an urgency to buy now - I'd rather wait to be honest.


So much as I laud your view of buying for the long term on long term fundamentals I can see plenty of reasons to pause for thought at this stage.

(So you can comfortably expect the FTSE to open +20% tomorrow and gain a further 10% in the days trading!)

FWIW there are a few bigger companies that are now beginning to look like compelling bargains to me now (including a couple that I already hold - being convinced that they are more defensive than the market seems to accept - curses).

I started a (quasi-) HYP a couple of years ago as the repayment vehicle for my rearranged mortgage and I've still not settled on my last two components of this - I expect to fill these vacancies during this year. Indeed as part of my "masterplan" I'll also be freeing up significant capital shortly which will roughly double the size of the HYP side of my investments and I'm convinced of the need to go slowly with this - to be honest I may try a variant of "pound cost averaging" on this - drip feeding into the market of the next 18 months or so, although I'll no doubt adapt this badly in some misguided attempt to time the market.


Anyway I've droned on quite enough on this (probably to little effect) but for me, much as I can see some prices in the market now looking rather compelling I can see no reason nor urgency to buy them now - whether you are buying for the long term or with a more active frame of mind.

If and when the recovery (in market prices) comes is there any reason to believe that it will be abrupt rather than gradual ?

Regards,

Gromley

Hi Gromley,

I agree with your comments about buying on the way up.

A key factor, IMO, is 'sentiment'; that unquantifiable element that keeps shares in bad companies expensive, and vice-versa. If a share drops significantly there will be a reappraisal of the value of holding that company (especially if the fall is due to some unheralded factor or macro event).

Once the sentiment has turned then a share can become oversold, and can stay cheap just about indefinately. These days I try to guage sentiment as much as anything else since it seems to be impossible to fight against it.

Rich

Just to add to Gromley’s post.

Although many books don’t talk about it, the investors job is more about protecting his or her capital than making gains.

If you buy a share and it goes down significantly you become trapped into either selling at a loss or waiting for it to recover. In both outcomes you have lost the flexibility that cash brings.

If we are now entering a protracted bear market there will be long periods when shares will get cheaper but not in one gradual decent. There will be spikes up on good news as well that can often suck buyers in.

Many traders will play for these spikes, buying into oversold conditions as measured by their gut or an oscillator in technical analysis, then selling into the spike, and also shorting at the moments when shares are over bought to gain on the fall.

A longer term investor who is buying on fundamentals often gets wrong signals in bear markets as analysts will lag in their estimates. Sometimes in bear markets it is better to buy when estimates have been cut hard so that shares look expensive, this again using the likely lag between analysts forecasts and reality.

Of course in practice it can be complicated and difficult to see what is going on. My own approach is to buy in small sub lots. If e.g. I wanted 1000 shares of X I would buy in say 200 share lots well spaced out and if the price starts tanking I would sell before the loss gets out of hand to preserve my flexibility for re-entry and also should the price spike up I would likely sell into it and await it coming back down. Often I will do this with limit orders so that I don’t have to be always at my desk.

Should conditions change and the market become bullish I would then switch to looking for pull backs to add to my positions which is like Gromley was suggesting but I am hoping to take advantage of profit taking to grab my part of a rise at a good price.

These types of tactics are only cost effective now that commissions are low and they do fly in the face of many investment books and of course Warren Buffett. But I am investing much smaller sums than Warren and I pay attention (most days) to the market.

Regards,