Thursday, August 09, 2007

CNBC INTERVIEW and Waiting 'till the Fat Lady Sings

NEWS FLASH: Marketpsych Managing Director Frank Murtha on CNBC today!!! See the video here.

Market fear is spreading, and that's a good thing.

This afternoon a stranger sitting next to me on the subway asked me how the market was doing today (someone who didn't know I work in finance). When anonymous strangers stop staring straight ahead, and start nervously inquiring after the health of the stock market, then it's about time to search for bargains. I figured that experience was the opposite of knowing it's time to sell when you shoeshine boy (or cab driver, or doorman) is offering you stock tips.

As predicted in my last blog post - shameless self-congratulation :) - the market would drop, bounce, and then drop again on greater fear. Below is this morning's market fear chart. Notice how investor pain has risen well above March's pain levels (this is a 7 month chart).

The sell-off will continue, in fits and starts, until the full depth of the (1) subprime mortgage defaults and (more importantly) (2) Credit (and thus liquidity) squeeze on borrowers is comprehended. As long as there is uncertainty, the markets will not rest, and the relief rallies will be only brief and tentative.

If the extent of overextended borrowers (and subsequent defaults) turns out to be as bad as the Chicken Little's are claiming (unlikely), then the market may not rally until congressional legislation is passed and it's ramifications are fully understood (not a good thing in the short-term). Such legislation would be intended to prevent further profligate borrowing by debt-weary consumers. And better credit monitoring and preparation for liquidity crunches (higher reserves) by financial institutions. As long as interest rates remain low, the expansion should continue with only minor economic consequences. It's just a waiting game now -- to see what the fallout will be, and then it will be time to buy.

Ah, but that's idle speculation of a nervous mind. We have had a pattern of profitable buying on dips recently (past 4+ years), and it's possible that many have become seduced by the ease with which they made money -- letting their guards down. That could end badly, or it could keep on. In any case, it will be safe to buy dips when the cards have all fallen and the hands are turned. We need capitulation, panic, and consequences. Then the liabilities of the losers will be known, and the mess can be cleaned up.

Happy Investing,

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