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Did Anyone Hear That Bear Growling?

Including a 358.41-point loss Thursday, the DJIA was down 4.2% for the week

June 29, 2008       Leave a Comment
By: Jerry Cole - Retirement, Investment

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Grrrrrrrooooowwwwwllllllllllllllll! That big old bad bear could be heard loud and clear at the end of the week. On Friday the Dow Jones Industrial Average closed down 106.91 points at 11346.51, now down 19.9% from its October 2007 record (20% down constitutes a bear market. Including a 358.41-point loss Thursday, the blue chips were down 4.2% for the week.


A sorry performance any way you look at it, but as always when things get really bad there is opportunity for those who are adroit enough to take advantage of it. In times like these it may be wise to bite the bullet and clear out those investments that are unlikely to respond to the inevitable turnaround in the market. There's a decent argument to be made for buy and hold and investors ultimately end up better off than if they had tried to sell at the top and buy at the bottom. However, the economy is a dynamic thing and you have to move with it or face getting stomped.

This doesn't mean taking absurd action such as selling every investment that hasn't performed as you had anticipated or would have liked. It does mean taking a hard look at those investments that will have difficulty regaining their former value in a reasonable time given the changing economic environment.

When the market becomes beaten up it is obviously adjusting to measurements that meet more historical norms. This may produce an attractive level by some metrics. However, remember a sustained rebound may be months away. In any event at the levels reached on Friday, the Dow is down 14.4% for the year and the S&P 500 is down 12.9%. The market now stands at levels not seen since September 2006.

These levels will be interpreted as attractive by some. For example, the S&P 500 now trades at a price to earnings ratio of about 15, i.e it is trading at about 15 times this years expected earnings. The 10 year average is 18.7, covering a period of investor exuberance, as well as the 200-2002 market downturn..The 24 year average P/E ratio is 15 and that includes periods of much higher inflation than now. Comparing the market's earnings yield to the 10-year Treasury note is another measurement used by many. This is the market's earnings divided by its price. Today the market yield is about 3.36% above the 10-year Treasury, suggesting stocks are more attractive than bonds.

Market adjustments such as we have just experienced can be due to a number of problems such as inflated stock values (probably not this time), mounting inflation, rising interest rates or a recession. Record oil and other commodity prices are pushing inflation higher. The country has been flirting with recession during 2008, but has not entered recession, at least by the accepted definition of recession (two successive quarters of negative growth).

There is no average to either an up or a down market. Each one has its own characteristics. What important is to not panic and make foolish mistakes. Remember Newton's third law - for every action there is an equal and opposite reaction.

In the meantime, be sure to keep your risk within your tolerance and stay 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 or of www.mybaycity.com)



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Jerry Cole - Retirement, Investment

Jerry Cole has been a Financial Planner for almost 30 years in the Tri-City area and holds and MBA from USC.
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