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Is it Time To Buy Stock Yet?

Posted by admin on September 10, 2007 in Investment Strategy

As Friday’s stock market activity showed, we may not have hit bottom in the market. U.S. monthly payroll numbers fell for the first time since 2003; some experts believe that this may be a sign of recession. This may be a bit premature and a sign of panic to call one month’s payroll numbers as a sign of recession. But with all this doom and gloom talk, is it time to look for buying opportunities?

Historically, most shocks to the stock market require several players to go down in flames. The tech boom had hundreds of publicly traded tech companies go under and larger players such as JDS Uniphase and Nortel never really recovered.  In this subprime/credit bubble correction, the damage still seems quite contained at this point in time.  American Home Mortgage Corp. did file for bankruptcy and Countrywide Financial Corp. has publicly stated that it intends to lay off 20% of its workforce.  Both were large subprime players but none of the larger financial institutions have asked for a bail out yet (from what I understand, money put into the system by central banks was injected voluntarily).

This either suggests that there isn’t enough blood on the street to present buying opportunities or the damage is indeed contained to smaller niches in the larger financial system.

I am also going to quote directly from Francis Chou’s 2007 semi-annual report. Chou is a respected mutual fund manager noted for being a disciplined value investor:

“Despite the current turmoil in the marketplace, we continue to have problems finding compelling bargains in common stocks… it may take a while (and maybe a long while) for the excesses to wring themselves out of the system…”

I also note that Chou’s Bond Fund has an average month-end cash position of 62% of net assets and his Associates Fund (which is primarily invested in stock) has a cash position of 45% of net assets!

What I take from Chou is that I should continue to stay in cash and focus on looking for bargains.

As one final note, the one factor to consider is that the 2008 U.S. Presidential Election has, for all intents and purposes, started even before both major parties have chosen a candidate. In such a context, the U.S. government may take measures to prop up the economy. If such a move also includes lobbying the Federal Reserve to lower interest rates and the Feds do so, it may provide a stimulus to the stock market which is not based on the fundamentals of the market or the economy per se. In other words, the government could put a band-aid on the solution until the election is decided. In such a case, I may use this opportunity to pay down my variable rate mortgage rather than invest in the market.