I'm Starting To Think "Opportunity"

Amid the fear and restlessness in the markets these days lies a golden gem of opportunity - capitalizing on the impending upswing.

Let me give you my reasons why there is an emerging opportunity amid the pandemonium on Wall Street, and why we should have our investment radars on full alert in the next few months.

The drops in the market are increasingly based on fear rather than on investment fundamentals. There is no question we had a huge bubble in the previous several years. The credit available in recent years for almost anyone to get a mortgage (and the subsequent securitization of those mortgages on Wall Street) was totally unsustainable in the long term. We are now feeling the fat and excess being wrung out with considerable force and immediacy. That is the fundamentals behind the recent drop in the stock market, and it was a necessary correction in our economy. But now that the Dow has slid on a week-long fall back into the 8,000's, we are starting to see fear, rather than fundamentals, drive the prices lower thus allowing bargains to emerge in the near future. But before we get too excited and start buying, we need to realize that the fear factor is really just starting, and if it gains momentum, we could see the Dow tumble even further, despite glaring fundamentals showing that prices have negatively overshot values of strong companies.

If we analyze the possibilities for the current bottoming out of the market against historical precendence, we could face a Dow that dips to below 6,000 before it starts on a strong upswing. These numbers are based off the research of Robert Shiller, a Yale University professor of finance who uses an adaptation of the Graham P/E (share price to company earnings ratio). According to the Wall Street Journal, the formula divides the price of major U.S. stocks by their net earnings averaged over the past 10 years, adjusted for inflation. Currently, the Graham-Shiller measurement has the S&P 500 at 15 times earnings, the lowest level since 1989, but still not far off from the average (which includes yearly data from 1881 to now) of 16.3. The times when the measure went way low was during World War II, 1977, and 1984, years which had the measurement at 10 or below. If the Graham-Shiller measurement for this market dropped to below 10, the Dow would be below 6,000 - a possibility given that the measure did go below 10 in the dates mentioned.

That's the bad news. The good news is this: the Dow may never drop to that point for two main reasons:

1. Heavy government intervention aimed at recapitalizing the markets, so much so that it is historically unprecedented. This was the fundamental mistake of the Depression era. Hoover did nothing and it hurt our economy for a long time.
   
2. Bargains are beginning to be noticed by buyers. For example, according to the same Wall Street Journal report, out of 9,194 stocks tracked by Standard and Poor's Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year. One extreme example is Charles Schwab which has $27.8 billion in cash on hand yet the stock market values the company at $21 billion! Wow! Talk about undervalued!

"The market is moving on fear, not facts," said Eugene White a Rutgers University economics professor who was citing the main similarity in our time with the Great Depression.

What does all of this mean? Well, like I said, keep your investment radars on high alert, we are in for an investment opportunity of a lifetime. I don't suggest jumping in right now, like I said, the fear is just beginning to gain momentum and you don't want to deal with a drop from 8,000 to 5,500 in the next few months (if that happens, I'm not necessarily saying it will, but it could). I'm not sure when I'll pull the trigger and start buying into the market, but I can gaurantee that I am not going to let this opportunity slip away only for me to look back on it in 8 years (which it may take that long ;) and say "Man, I wish I would have put money in back then, the market is at 18,000 right now!"

Let me also be clear that this "opportunity" is really only suitable for those who have a long-term investment plan (long-term defined as 20+ years). If you are in your 20's or early 30's and need to invest for retirement, the upcoming months (possibly even weeks, but that's starting to get risky) are an awesome time for you to start doing so. What that means is, people who may be in need of the money in the short term should not mess with this market, it will probably eat your savings to shreds (even more than it has already) and you may not have the money when you need it the most. This is not an investment strategy for retirees! But for us youngin's, we'd be crazy to not plan on getting in soon.

Also, I would never suggest that anyone invest without professional help. Not knowing what you're doing can cause grief and heartache even if the overall market is strong.