I am getting really tired of those in this business telling people not to panic. Not that I mind sound, rational thinking, but to simply package what is transpiring now into an "all is well" message completely misses the boat.
Don’t be fooled by the precipitous drop over the edge triggered by the failure to pass a government bailout of the credit crisis. There are much larger problems than the immediate news that so many are now focused on.
It is really not that difficult to analyze. Think about it for a minute, and maybe you will finally see the light.
Why is it that when the market is down significantly in one session everyone immediately assumes panic has set in? Could it possibly be an adjustment to a very real problem in the U.S. economy?
Today, the major indexes were down between 7 and 9 percent in the immediate aftermath of the bailout being voted down in Congress. Wall Street traders looked like deer in the headlights when the news hit.
After being told that a deal was all but done, many figured and were counting on stocks to rally. "Hooray, we can all celebrate the saving of the financial system." And so stocks could rally unabated.
Ok, what’s wrong with that view? It turns out there is plenty wrong. Not so fast, Mister.
There is and will be a cost to this plan—even if it passes. I honestly believe that stocks were heading lower irrespective of the vote. Again, the issue is not panic, but instead valuation. (See also: "Why It’s Not to Late to Sell.")
It’s all about valuation, or at least it should be. The bailout has been one big fat distraction if you ask me. Putting the issue behind us would allow investors to focus on the next thing.
That next thing is not very pretty. With or without a government bailout, I just cannot see how stock valuations can hold up. Yes, it may have been panic today that pushed us over the edge, but I think we would have gotten to that point anyway.
We have been in the grips of a credit freeze for a short period of time. For the most part what has been transpiring has been occurring at the 30,000 foot level. That is to say, the problems have been at the institutional level instead of on the individual level.
Unless you work for any of these companies involved in this mess…
>
…you have simply gone about your business with only modest curiosity as to what is happening on Wall Street.
The bailout plan may have gotten your attention as $700 billion dollars of taxpayer funds will do that to an individual. Add in the classic rich greedy guy versus the poor main street guy, and you had all the ingredients of a wonderful soap opera.
For those on Main Street, opposition to the plan was resolute. Legislators were seeing calls against the deal, some with 100-to-1 against it. Citizens have yet to grasp what the crisis means to them on an individual basis.
The problem, though, is that the credit crisis will indeed impact Main Street in a very large way. Investors, for whatever reason, have not been able to calculate the magnitude of that impact. That uncertainty leads to volatility and greatly increases risk.
You simply cannot have a one in a hundred year crisis without there being a sizeable impact in the overall economy. It just doesn’t work that way. There is no free lunch.
Why is that so hard for people to grasp?
What is transpiring now is the kind of disbelief reaction to a market in decline that is very reminiscent of the drop in the Nasdaq index in 2000. Do you remember what happened then—stocks that were grossly overvalued began to sell-off in 2000. The index dropped over 1,000 points in a short period of time. Don’t panic.
That was the call then of the pros, and it was the wrong call. When the index invariably snapped back, investors would have been wise to cash in and disregard the sage advice. Even with nasdaq 2,500 investors could have locked in profits as there was more than 1,000 points left in the decimation.
Now seven years or so later the Nasdaq is trading a mere 600 points above that bottom. Today, given the almost certainty of an economic decline that may last much longer than most expect stocks are over valued.
Yep, there will probably be a snap back rally here too when a bailout deal is finally completed. I would use that occasion to lighten up on stock exposure. Eventually the impact of the credit freeze will hit Main Street.
When it does, watch out. It is still not too late to sell.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, visit InvestorPlace.com and check out:
