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Why are people throwing their stocks away?
Old 01-15-2008, 04:29 PM   #1
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Why are people throwing their stocks away?

Is it because they think the consumer is dead? We are going into the Recession ? Would this not be a good time to rebalance toward equities? I heard some knowledgeable say the time to buy stocks is in a recession. Even if the S & P 500 2008 earnings estimate dropped to $90 (now in high 90's I think) it looks like it is well priced in already.
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Old 01-15-2008, 04:54 PM   #2
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That'd be great if earnings only fell to $90.

In the last recession, S&P earnings went from $65 to $30.
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Old 01-15-2008, 05:53 PM   #3
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Have a plan and stick with it. We'll never know where the bottom is or the exact perfect time to buy. If you stick to your asset allocation model, invest for the long term and dollar cost average you'll be fine.

Most people are sheep. They don't know why they're selling they're just selling 'cuz "everybody else is". It's the same herd mentality that drove the bull market of the 90's and the subsequent bust. The same herd mentality that drove the real estate bull market and subsequent bust. The same herd mentality that will keep inflating the "hot" sectors of the market to unrealistic levels because people feel that everybody else must know something they don't so they put my money there too, even they have no idea what they're doing. Most people don't learn from their mistakes. What's that old saying? Those that don't study history are doomed to repeat it? Something like that. Anyways......

If you know what your plan is, these foolish hiccups won't matter at all in the long run.
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Old 01-15-2008, 06:35 PM   #4
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That'd be great if earnings only fell to $90.

In the last recession, S&P earnings went from $65 to $30.
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Old 01-15-2008, 08:43 PM   #5
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and some big banks may not make it

I think it was MBIA that just sold a bunch of debt 14%. why would a company rated AAA have to pay 14% on new debt?
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Old 01-15-2008, 09:28 PM   #6
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There are studies which show that sitting out bear markets puts you way ahead of a buy and hold - no surprise. But even if you pull out too early, as it's easy to miss the exact top, you still come out way ahead. That includes missing the usual big bull runs that occur right before market tops.

Big cyclical shifts aren't impossible to figure out. Sure you're unlikely to time it perfectly but it doesn't matter, get it within a quarter or two and you'll still be ahead.

The other part of this is being in a bear market investment, like moving to bonds. The bond market is generally more conservative and more forward looking than the stock market, in my experience. So to catch a good point in the recessionary bond market rally you need to be a bit early.

An acquaintance of mine, who is a friend of Bernstein, does this and retired very early because of it. I'm doing it this time around and so far it's worked well.

I'll reiterate, it's difficult/impossible to do precise market timing (day trading), but it's not too difficult to look at the big turning points. This market turn, if you tune out CNBC, wasn't hard to see, nor was the top in the housing market.
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Old 01-15-2008, 09:32 PM   #7
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and some big banks may not make it

I think it was MBIA that just sold a bunch of debt 14%. why would a company rated AAA have to pay 14% on new debt?
Because not all AAA credits are the same.

No sane person would say that $1 billion dollar insurance policy issued by Berkshire Hathaway (AAA credit rating) and a $1 billion dollar policy issued by MBIA (AAA credit) would have equal chance of been collected on in 20 years.
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Old 01-15-2008, 09:58 PM   #8
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At the current rate of decline, the S&P 500 should attain zero by mid April, by which time anyone with a buck in their pocket can own the entire US economy for no cost.

Its quite fascinating. Its also obvious that pure "buy ... and hold to zero" is stupid, and that as difficult as market timing may be - the rewards of even being close are huge!
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Old 01-15-2008, 10:03 PM   #9
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At the current rate of decline, the S&P 500 should attain zero by mid April, by which time anyone with a buck in their pocket can own the entire US economy for no cost.

Its quite fascinating. Its also obvious that pure "buy ... and hold to zero" is stupid, and that as difficult as market timing may be - the rewards of even being close are huge!
Watch out for flying pigs...
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Old 01-16-2008, 03:19 AM   #10
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im not usually a dirty lil market timer but this time i started to lighten up last early november. im around 30/70 now. as uncomfortable as i was when i was 60/40 im just as uncomfortable now afraid the market will turn on a dime and once again i may get some money back in at a discount but the bulk may end up going in higher than i bailed.

soooo now i see the problem is alot of investors are just dying to get back in at some entry point myself included. and i think we all may end up shooting ourselves in the foot as we all try get back in again around the same time. the markets have been looking so miserable that we are all on the same side of the fence and think alike , more so than any time i can remember.
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Old 01-16-2008, 05:09 AM   #11
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I've lost 7.15% since Jan 1, the end of the world is coming Seriously, if you can handle the volitility or are in accumulation phase then I would take advantage of the opportunity to rebalance towards stock. If not, then you probably should not be there anyhow.

Last year we had two 10%+ declines and my portfolio ended up over 13%. The rallies were fast and furious with no logical warning. This will bounce back quickly or drop another 15% but Miss Cleo says that in 15 years this will just be a blip on a cool S&P chart

PS: If you have a mortgage look at refinancing. The current volatility has really driven down mortgage rates and might be an even better opportunity than rebalancing.
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Old 01-16-2008, 08:49 AM   #12
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Originally Posted by cashflo2u2 View Post
I heard some knowledgeable say the time to buy stocks is in a recession. Even if the S & P 500 2008 earnings estimate dropped to $90 (now in high 90's I think) it looks like it is well priced in already.
Yes, you can do very well buying equities during a recession, because usually once we are well into a recession, the market has already priced in the poor economic situation (and then some). Last time we went into a recession in 2001, but the market had its worst sell off in 2002. So it's really hard to time this stuff.

IMO, it is still early yet. Even though averages are down well over 10% from the peak on Oct 9, there could still be quite a bit more downside to go.

I'm due to rebalance next Jan. Unless my portfolio goes sufficiently out of balance before then, I'll be sitting on my hands.

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Old 01-16-2008, 09:14 AM   #13
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Because not all AAA credits are the same.

No sane person would say that $1 billion dollar insurance policy issued by Berkshire Hathaway (AAA credit rating) and a $1 billion dollar policy issued by MBIA (AAA credit) would have equal chance of been collected on in 20 years.
the most ridiculous thing i've ever heard

this is the reason for different ratings. AAA is the top and commands the lowest rates. higher risks mean higher rates.

14% is a junk bond rating or on the fence

by your logic my employer should have a AAA rating as well even though it pays 12% on it's debt
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Old 01-16-2008, 09:50 AM   #14
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Luckily I will know when we reach the bottom. It'll be when my sisters call and tell me they are thinking of cashing in their mutual funds.
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Old 01-16-2008, 11:16 AM   #15
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There are studies which show that sitting out bear markets puts you way ahead of a buy and hold - no surprise. But even if you pull out too early, as it's easy to miss the exact top, you still come out way ahead. That includes missing the usual big bull runs that occur right before market tops.

Big cyclical shifts aren't impossible to figure out. Sure you're unlikely to time it perfectly but it doesn't matter, get it within a quarter or two and you'll still be ahead.

<snip>

I'll reiterate, it's difficult/impossible to do precise market timing (day trading), but it's not too difficult to look at the big turning points. This market turn, if you tune out CNBC, wasn't hard to see, nor was the top in the housing market.
Let us know when "the market" hits bottom. By the way, what are emerging markets, international markets, and REIT going to do?
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Old 01-16-2008, 11:31 AM   #16
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Don't talk to me about volatility. I can't handle the volatilty!!
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Old 01-16-2008, 02:24 PM   #17
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the most ridiculous thing i've ever heard

this is the reason for different ratings. AAA is the top and commands the lowest rates. higher risks mean higher rates.

14% is a junk bond rating or on the fence

by your logic my employer should have a AAA rating as well even though it pays 12% on it's debt
Al that is my point MBIA's AAA credit rating is a farce. The poof is the difference in the interest cost for MBIA long term debt 14% vs Berkshire AAA rating debt< 5%.

MBIA made a deal with Moody (I believe) that if they did some things they'd maintain there all important AAA credit rating. They did and low a behold their AAA rating was reconfirmed. It is is this kind of financial sleight of hand which created the subprime mess.

Imagine a typical investor looking for a 20 year Muni bond. His broker offers him two new issues both insured and rated AAA one bond pays 4% the other is at 4.1%. Typical investor would go for the 4.1% cause AAA rate bonds are equally safe.. The reality is the 4.1% is a revenue bond, issued buy a debt ridden city, and insured by MBIA. The other is general obligation bond, issued by a fiscally responsible city, and insured by Berkshire Hathaway's new bond insurance company.

The additional 10 basis points in no way compensates for the additional risk, but the AAA credit rating allows the broker to say with a straight face, 4.1% is better. It is subprime all over again and it is wrong.
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Old 01-16-2008, 03:14 PM   #18
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I'm generally an index investor who does an 80/20 AA and dollar cost averages, pretty boring, but when the market came down to 13000 and with all the recession talk I moved 75% of my US equities into my MM. I'm not 50/50. I'm still down in the short term as my international funds are all down. But I'm going to sit tight until we get an up tick in consumer confidence and the banks have declared all their losses, probably 6 months. I'm betting the bottom will be somewhere around 12000
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Old 01-16-2008, 03:27 PM   #19
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I'm generally an index investor who does an 80/20 AA and dollar cost averages, pretty boring, but when the market came down to 13000 and with all the recession talk I moved 75% of my US equities into my MM. I'm not 50/50. I'm still down in the short term as my international funds are all down. But I'm going to sit tight until we get an up tick in consumer confidence and the banks have declared all their losses, probably 6 months. I'm betting the bottom will be somewhere around 12000
If people are throwing their stocks away, which I doubt, it must be for various reasons. One, other than threatened or possibly threatened or apparently threatened financial stocks, the market prices are still fairly high. So people who are no longer confident can still salvage a lot of profit.

The other factor is the perception that a recession may be on the way. This has weighed heavily on retail stocks, as did the poor Xmas selling season. Today the energy stocks got into this play too, since a recession should it occur will almost certainly knock down the crude price, and likely NG price too.

As has been pointed out, often equity prices fall in anticipation of a recession. But this time we haven't seen much of that.

If stocks do start to be thrown away, it will be a lot more intersting than the recent action.

Ha
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Old 01-16-2008, 07:39 PM   #20
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Maybe I overstated the case with "thrown away" but it looks like indiscriminate selling. There is very little hard data to indicate recession I think. Even so, should there be this much fright over an event that they say you don't even know you been through it till after its over??
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