Monday, January 21, 2008

Too Late to Turn Bearish

It's funny how stock market bulls often turn bearish after prices have already fallen. I've been a bear for quite a while and found myself debating a number of bulls over the past year. One well-known bull even argued that by giving bears like me an equal amount of air time, the media was falsely creating the impression that economists were split on the issue of future growth.

Today there are no serious economists left who are predicting strong growth. The most bullish among them, including Fed Chairman Ben Bernanke, are predicting only weak growth. Many believe a recession is quite likely. Some, like myself, believe a recession has already arrived. Even non-farm payroll growth, perhaps the most encouraging economic measure all along, is starting to show serious signs of strain.

Today I had an interesting conversation with Professor Michael Goldstein of Babson College. He and I worked together over a decade ago when we were both on the faculty at Boston College. Michael was preparing for a television interview about the stock market. He reminded me that a year ago both of us were scratching our heads trying to understand why stocks were rising so rapidly. At that time, we were both concerned about falling house prices and their detrimental effects on consumer spending. Today we are just as concerned about rising credit card defaults.

Dow futures are currently indicating a very weak opening tomorrow morning. The Dow may immediately plunge 500 points or more. Michael and I think it could even dip below 11,000 soon--at least on an intra-day basis. However, we also agreed that significant declines below that level are unlikely.

Most long-term investors should take a contrarian view. At this time, they should be thinking more about buying than selling. It isn't yet time to jump in with both feet, but it is time to start thinking about taking advantage of serious dips. Some Special Situation stocks we continue to favor include SVU, RKT, and PERY. These also are stocks that I personally have been buying.