Stocks

[Stewie]

Originally Posted by alnorth

Another common misconception is the thought that after we do go into a recession (or merely a period of weak growth), many people think that stocks will then go down because of that.

Thats not really true, because the market does not wait for long-expected events to happen, they anticipate future events. It's already been priced in, the stock market got hammered this year already because the market thinks we will go into a recession. If that happens, it wont be news. What would be news is that the assumption was wrong and we didnt go into a recession (huge rally), or after the recession is "official", whether it will continue for a full year or end after only a couple quarters. That would be news.

If you are selling or staying out, you arent betting on us going into a recession, because its too late for that, thats already been priced into the market. If you wanted to bet on a recession, you needed to sell about 4-6 months ago. By selling/staying out now, you would be betting that we stay in a huge recession for a year or longer. If we get the news in 3 months that a recession did in fact occur but the analysts decide its going to be a short recession, the market would price that expectation in for a big jump in spite of the fact that the good news hasnt officially happened yet.

All of that is only relevant to market timers, of course. If your going to be a long-term buy and hold investor with more than 10-15 years remaining till retirement, you shouldnt really care about this minute-by-minute short-term stuff unless you think the US will be in the toilet in 15 years.

I agree that the market anticipates the economy down the road, but we're in an unprecedented mess that is really negative. Here's what I'm hearing by respected financial advisers. That eliminates anyone on CNBC or any "financial planner" that's been drinking the Wall St. Kool-Aid.

1) The dollar is going to .52 and Goldman Sachs just said $175 oil within two years. Those two go hand in hand.

2) The FED has started to monetize bankruptcy (see Bear Stearns). This could get really ugly, really fast and is VERY inflationary.

3) The credit market is much worse than the FED wants the general public to know to avoid a panic.

4) Today John Lipsky of the IMF told States to prepare for the worst due to the credit crunch.

5) On Tuesday the FED took worthless paper (subprime garbage) as collateral for $200 Billion. That was historic.

There's more but I'm out of time.

For the novice, think of the credit crunch as this. You have stock certificates of several companies in hand. When you bought the stocks they were worth $1000 total. Later you find out that the stocks weren't what you (or the market) thought they were. Now, no one has any idea what you own and it's probably worth alot less. You go to sell the stocks and there are no buyers (or they're offering $50) BUT YOU NEED CASH TO PAY YOUR BILLS and $50 doesn't come close to your needs. That's why all these banks need CASH from the FED. They're holding worthless paper and will go bankrupt without free money from the FED (paid by you with the hidden tax called inflation).

That's simplistic but hopefully it's helpful.

Edit: I said the FED took garbage collateral in exchange for $200 million. That should be $200 BILLION.