Tuesday, March 3, 2009

1997 Was a Good Year?

While it's true that Princess Diana died in a tragic car accident and Mother Theresa passed away, 1997 wasn't so bad, right?  The stock market had a good year, well, if you ignore the "crash" that occurred on October 27th, where the Dow plummeted 518 points or 7.18% to 7,161.15 that tripped circuit breakers at the NYSE.  My memory is fuzzy but it had something to do with an Asian financial crisis, not to be confused with the other "crash" in 1998 related to the Long Term Capital/Russian financial crisis.  Of course 1997 was also the year that "Titanic", the highest grossing movie of all time, was released.  Whether you think that was a highlight or not is dependent on the depth of your love for Leo, and whether you had a strong enough stomach to endure Celine Dion's rendition of "My Heart Will Go On" played ad nauseam on the radio.  Maybe 1997 wasn't such a good year after all.

Stock investors are revisiting 1997 whether they like it or not, as the indexes breached 1997 levels yesterday.  Many claim that stocks are dirt cheap, while others argue that the economy is in such dire straits that equity values have much further to fall before they stabilize, much less recover.  I'll admit that its hard to come down on either side of the debate.  Stocks are certainly much cheaper than I have ever seen them in my 17 years following the market.  However, that doesn't mean that they can't or won't get cheaper.  In some sectors (i.e. financials, insurance, homebuilders, or any industry that has significant debt) the equity trade becomes binary.  If the company doesn't go bust in the downturn, then the stock might be a big winner.  Obviously the risks are high, which explains why stocks in those sectors have been beaten to a pulp.  They are either really cheap, or worth zero.  This has become painfully clear to investors that bought stocks in "highly regarded" companies pumped by analyst recommendations (AIG, LEH, MER, BAC, WB, WM etc) this past year that have lost over 95% of their value.  

At some point, getting hit over the head with a stick over and over again leads to a change in behavior.  When the average investor gets tired and leaves the market, all you have left are people like K10, who like to take risk.  I understand what most of the risks are, including the fact that I definitely don't know all of the risks, but I still like to show up to play anyway.  Not everyone enjoys this style of investing (aka "trading") and many will throw in the towel which should lead to capitulation.  I'm still waiting for capitulation before placing a longer term bet on equities.  I have no idea when or how it will happen, but I suspect I'll know it when I see it.  


Mr Wrightwood said...

K10 is the Donald Rumsfeld of the financial risk world.

mrbogue said...

I'm still waiting for capitulation of the "nice hoods" real estate market. Eventually it will come, and the delusional homeowners, like those in the "whack hoods" won't know what hit 'em!