OT: Is This The Right Time to Go Long Stocks?

Editor's Note:

A friend of mine sent me an email in which he wondered whether, after
yesterday's 777 point drop in the market, now might be the right time
to go long stocks? I responded to him as follows:

Wes (not his real name):

As for the stock market, you are right: It takes a lot of balls to put
money in the market right now. Going long right now could turn out to
be one of the greatest plays in investment history going out a year
(or two) from now. (Believe me, if the market makes a dramatic
post-1987 style recovery, the people who are buying stocks tomorrow
will be hailed as geniuses six months to a year from now.)

The problem though about going long right now is whether this is a
repeat of 1929. Financial events that were thought of as being
“unthinkable” this time a year ago are happening virtually every day.
I’m talking about things like bank failures and the Government trying
to prevent bankruptcies with major infusions of liquidity into the
banking system. These events indicate a system under severe stress –
a system on the verge of collapse. When Mr. Paulson and Mr. Bernancke
first went to see Mrs. Pelosi, Barney Frank, and leaders of the
Senate; they spoke in terms of this being a “once in a hundred-year
event.” Now maybe they were exaggerating just to scare the hell out
of our elected leaders, but an “emergency request” for $700 BILLION
taxpayer dollars is not business as usual.

When you read about things like CDS (Credit Default Swaps) and other
forms of toxic financial waste that are floating like mine fields all
over the world, nobody really knows how much of that junk is out
there. (Some commentators and so-called “experts” in mortgage-backed
securities are saying that there is between 60 and 70 TRILLION dollars
worth of credit default swaps alone – which explains why our
Government has been desperately merging and consolidating the weaker
banks with stronger banks. If a bank or insurance company that has
bought or sold a lot of these credit default swaps goes under, then
that’s a systemic risk – ball game over. (That’s the real reason why
the Government stepped in and prevented AIG from filing for bankruptcy
protection. The danger of a 1929-style collapse – if that company
failed – was too great.) Warren Buffett has long warned about the
dangers of derivatives and other “complex financial products” that are
backed by all these bad mortgages. We’re in trouble here because I
don’t think anybody ever imagined that hundreds-of-thousands (if not
millions) of mortgage holders would walk away from their obligations.
Everybody thought the party would last forever. On such mistaken
assumptions financial calamities are built.

When the Government starts intervening on a massive scale in private
markets, you know that something is seriously wrong.

Here’s something else to consider. Year-over-year the price of gold
is up over 100 percent. A little more than a year ago, you could buy
an ounce of gold for between $400.00 and $500.00. Gold closed
yesterday at $910.00 an ounce. When gold starts rising like that,
it’s usually a bad sign for equities.

It could be that going long in stocks right now will turn out to be a
genius move. On the other hand, if we truly are in the grips of a
“100 year event,” then the smart move might be away from equities and
into gold and cash – for the time being. I don’t know how all this
will turn out, but I’m not sure how many more days (like yesterday) we
can survive before there is a total collapse of confidence. The
things that are going on right now are the kind of things you don’t
want to see.

Alan C. Lawhon
Huntsville, Alabama

.

Relevant Pages

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