Don't Wake The Bear . . . You May Not Like an Angry Carnivore
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Bears Battles Bulls For Control of the Economy
It is a fact that the bear does not go into true hibernation, but rather goes through torpor or a deep sleep. Therefore the bear can be woken up during its winter sleep. Like many human beings, it is likely that disturbing the Bear's sleep would make it angry and bring on a display of ferociousness. So obviously you don't want to wake the bear. That message seems to be lost on the market, because the market is doing its very best to do just that!
In market terms, a bear is alive and well (let's say alive and active) when the Dow Jones Industrial Average has fallen 20% below its previous high. The previous high was 14164.53 set on Oct. 9, 2007.
Friday the Dow closed at 12099.3 which puts it down 14.58% from its previous high and less than 800 points away from becoming a bear market. It also made this year's first 13 sessions in the market the worst start ever. Not a pretty picture to be sure.
Friday stocks surged early, shaking off some of the brutal declines of recent days, partly on hopes for aggressive economic stimulus from the government and Federal Reserve. But after the president's speech about the need for economic stimulus and comments about that need from Treasury Secretary Paulson, the Dow fell into the red and stayed there the rest of the day. With the possibility of recession weighing heavily on the market, investor sentiment will remain fragile until either the Fed cuts rates aggressively or clear signs emerge that the economy will dodge a downturn.
No amount of talk from Federal Reserve Chairman Ben Bernanke or the administration seems to calm the fears of recession. Bernanke told Congress on Thursday that an efficient and temporary economic stimulus package could help prevent a recession. Bernanke said a package of up to $150 billion would help boost economic growth. Adding to this positive talk was upbeat reports from some of the largest corporation in the U.S.. Last week, for example, IBM Corp. put out a stellar forecast for its business in 2008, saying that it expects to earn between $8.20 and $8.30 per share, well above Wall Street's estimate of $7.94 per share.
General Electric reported Friday morning that earnings for the fourth quarter were $6.7 billion, or 66 cents per share -- a 15% rise from the $6.44 billion, or 62 cents per share, that GE earned in the fourth quarter of 2006. Revenue beat Wall Street's estimate of $47.28 billion, rising 18% to $48.59 billion in the quarter.
Despite the positive news, the market appears to want to concentrate on the negative. And to be sure there has been plenty of that with the continuing fall-out from the subprime debacle. However, whether the market will become a self-fulfilling prophecy for the naysayer, depends on when investors think it is time to buy stocks again. With the rush to the safety of Treasury bonds, it may appear to some that stocks have become a bargain and Treasuries are massively overpriced.
One measure you can use to help evaluate stocks vs. bonds is the equity earnings yield. This is obtained by flipping the price to earnings ratio (P/E) for stocks. The E/P will give you a measure similar to the bond yield and allows you to compare stocks to bonds. Doing the math, you can see that as the price of stocks gets cheaper, the earnings become more favorable relative to bond yields.
Whatever you do, don't overreact. And remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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Jerry Cole - Retirement, Investment |
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