Monday, March 10, 2008

The bottom isn't here yet

I’ve done almost everything right to protect myself and make money during this downturn. Almost. The part I didn’t get correct was the magnitude of my positions. I’ve kept too much still in long equities and they’ve hurt me. From the peak in October, I’m down 4%. That’s a lot better than the “market”, but it could have been much better had I not been so conservative. Even so I have “most” of my powder dry and can participate when the bottom is put in. Will I be able to recognize the bottom or will I be like many people and still bearish for far too long and miss the big opportunities that will develop?

I think we’ve got the better part of a year ahead of us before the market finds a bottom. The banks are actively curtailing credit and that will slow the general economy. A slower economy will lead to earnings disappointments and lowered guidance. That leads to lower stock prices. If I’m correct on rising inflation, like I’m confident I am, that will lead to lower P/E multiples to correspond with lower earnings. Over the next few quarters stock prices will go lower.

People are not vomiting yet, but they will as the above unfolds. Too many are counting on a quick reversal to good times. As that dream fades prices will drop. Make sure your portfolio is vomit proof. Allow for a few verps, but do not get killed before the low prices arrive. I intend to take more money off the table when the fed lowers rates and the market rallies. The goal is to have all your money when the prices get compelling. We aren’t there yet!

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