The market has just been brutal. I have incorrectly thought the whole way down that stocks were reflecting a worse economic reality than was likely to occur. Obviously, this view has been proven wrong. I do believe that the market and the economic outlook are now in sync but that won’t help until the economic outlook stabilizes. If we magically could declare that the economy will be “really terrible but we promise it won’t be worse than terrible” the market would stage a very big rally. It is the fear of unknown, which grows every day the market collapses, that is now driving the devastation in individual stocks.
There is a total lack of confidence in any forward looking estimate. Therefore, even when it is obvious that a company’s business will not collapse the stock can be priced as though it will. For example, News Corp or CETV stocks are falling so rapidly that it suggests their revenues will collapse, down 50% or more. Yet, any realistic assessment of the likely demand for TV advertising or satellite TV subscriptions or subscriptions to the Wall Street Journal would show a worst case scenario where revenues fall 20%.
Maybe I am wrong and the downside is really as severe as the stock prices imply. One thing that makes it difficult for me is that I have an innate optimism. I have never believed doomsday scenarios. I just believe that things generally work out. The current market is telling me I am wrong.
There really seem to be just two things that can turn us hard upward. First, though it sounds stupid, we just need to go up. Investors are so scared and have been burned so badly with every buy since September that just a few days of upward momentum would remind us that you can in fact make money by buying. It may seem odd to those who don’t play in the market every day but what I am saying is that there will be many more buyers of a stock that has gotten destroyed at $20 or $30 or $40 than at $10. Right now, everyone is taking their signals from price. That needs to change.
Second, we need some good news. Either the macroeconomic outlook needs to stabilize or individual companies need to prove that the stock price is wrong compared to their ability to earn even in a severe global recession. I think lots of companies can do that. Just this week Dell and Hewlett Packard did that.
My optimism remains. This horrible period will pass. I know that Northlake’s strategies and stock picking work. They worked in 2005, 2006, 2007, and until late September 2008. They will work again.