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March 5th, 2009 – Another punishing week

Wow, what a week! And it’s not even over yet…

This week sees a continuation in the slaughter in equity markets. Today marked the sixth day of losses out of the last seven (with yesterday being the exception – the market was up on speculation that China will boost their stimulus plans and that lawmakers would reach an agreement on a plan to stem mortgage defaults). Well today we learned that the China speculation was just that – speculation; the Chinese Premier said there will be no changes in their plans. Furthermore Moody’s downgraded JP Morgan, fueling a slide of about 10% in financials.

It’s really a tough market in these times – it’s very volatile and investors don’t seem to be reacting in a rational manner. The slightest bit of news tends to move the market dramatically, regardless of whether the news is credible or not. The market seems to be driven by sentiment and emotion more than by rational logicĀ  and valuation. Maybe this is a great buying opportunity for just that reason – just as sentiment and emotion cause investors to get carried away on the upside, creating bubbles, we’re now creating a negative bubble (an abyss?) with investors getting carried away and creating buying opportunities. Of course, the difference being that if you fail to call the top of a bubble and sell too early, you don’t mind too much because you’ve likely still made a handsome sum. However, if you fail to call the bottom and buy too early, it’s devastating to watch the losses add up beyond the massive losses that your portfolio has already suffered.

Among other points to note recently: Citigroup (C) traded for less than $1 today (though it closed at $1.02), GE traded as low as $5.75 earlier this week, and the S&P 500 got almost as low as 675. Ouch…

Overall, I think we go up from here. It seems as if investors have really hammered stocks for no good reason (heck, the lack of news itself has the same effect on the markets as bad news). As our President said earlier this week, I think now may be a good time to buy stocks (if you can hold on for a few years, that is). The losses incurred thus far are amongst the largest historically and fear runs amuck. The S&P 500 is trading at it’s lowest level since 1996, wiping out 13 years of gains. The upside potential here is huge – a recovery of a modest 40% over two years could deliver you 80% or so with a leveraged ETF. Of course, as I said earlier, it’s hard to call the bottom. Does it make sense to get it now with the S&P 500 near 680? Will it bounce back to 720+ in a couple of weeks? Will it fall below 650? Who knows?

I certainly don’t – earlier this year I thought that the 750 we had reached during the fear and chaos of November, 2008 was as low as we’d go. I didn’t doubt that we’d test that level again, but I certainly didn’t expect that we’d fall another 10% past it. So, I called a bottom at 750 and was clearly wrong. 675 feels pretty close to a bottom now, but heck, given this irrational market and volatility, I just can’t tell…

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