It is nice to see a violent rally in the stock market for a change. It is also nice to hear that Citigroup may not be as sick as everyone thought. At last look, the stock was up about 35% for the day. Of course, for a penny stock, that does not mean much in absolute terms. Nonetheless, it is encouraging to think that one of the most important financial institutions in the country is actually going to survive the recession.
FAS 157 (mark-to-market accounting) has made many of our financial institutions look sicker than they actually are. Even those that are cash-flow positive look like they are losing money on paper. This has scared investors and helped drive stock prices down. In fact, Warren Buffett recently said, "The investment world has gone from underpricing risk to overpricing it." In the end, those companies that manage to survive will come out stronger; and those investors brave enough to take advantage of the turmoil will come out richer.
Despite today's good news, the recession is real and will continue for many more months. Credit spreads are still too high, consumers are still not spending, and corporations are still laying people off. Undoubtedly, stocks will remain volatile and we could see another selloff. Yet, I believe the risk of holding cash outweighs the risk of being long for anyone who has an investment horizon of five years or more.
Those who are interested can view these videos I taped for the MoneyShow on February 6:
Economy--No Progress Yet
Any Energy Plays?
Buffett Makes Mistakes, Too